By Jacob Greber
Sept. 1 (Bloomberg) -- Australia's mining boom, stoked by Chinese demand for coal and iron ore, helped boost company profits by the most in more than seven years and narrow the nation's current account deficit from a record.
Company profits advanced 14.3 percent in the second quarter, more than six times the 2.3 percent median estimate of 22 economists surveyed by Bloomberg News, the government said today. A separate report showed the current account deficit narrowed for the first time in two years.
Surging demand from China will increase Australia's export income by 20 percent this year, the central bank estimates, offsetting slower domestic growth and boosting profits at miners including Rio Tinto Group. A separate report today showed inflation held above the central bank's target range of between 2 percent and 3 percent, limiting Reserve Bank Governor Glenn Stevens' scope to cut borrowing costs in coming months.
Today's figures ``are not a bad result for an economy that was supposed to be facing the most challenging business environment since the last recession'' in 1991, said Katie Dean, a senior economist at Australia & New Zealand Banking Group Ltd. in Melbourne.
``The Reserve Bank will be very measured in its approach to easing policy in the coming months.''
The Australian dollar rose to 85.40 U.S. cents at 1:24 p.m. in Sydney from 85.36 cents just before today's current account and company profit reports were released. The two-year government bond yield rose 1 basis point, or 0.01 percentage point, to 5.70 percent.
Interest Rates
Stevens and his board meet tomorrow and will lower the benchmark interest rate by a quarter point to 7 percent, on signs economic growth has cooled to the slowest pace in more than two years, according to 22 of 23 economists surveyed by Bloomberg News last week.
The government will publish a report on Sept. 3 showing second-quarter gross domestic product rose 0.4 percent from the previous three months, when it expanded 0.6 percent, according to another survey of economists.
The central bank said last month it may soon cut its overnight cash rate target from 7.25 percent to avoid a ``deeper and more persistent'' economic slowdown. Policy makers raised the rate in March, February, November and August, 2007.
Reports published in August showed new home sales fell in July to a two-year low, lending to consumers and companies rose at the slowest annual pace since 2002 and business confidence held at the lowest level in seven years.
Jobs Boom
Still, today's reports suggest mining companies and builders are helping offset slower domestic growth, driving demand for skilled workers that pushed the unemployment rate close to the lowest in more than three decades. The jobless rate was 4.3 percent in July.
Profits for mining companies rose 41 percent from the first quarter, earnings for builders gained 20 percent and manufacturers' profits increased 15 percent, the Australian Bureau of Statistics said in Sydney today.
BHP Billiton Ltd., the world's biggest mining company, last month posted a 30 percent gain in second-half profit after boosting production of crude oil and metals to benefit from rising prices driven by demand from China.
The shortfall on goods, services and investment shrank to A$12.77 billion ($10.9 billion) from a revised A$19.84 billion in the first quarter, the statistics bureau said today. The median estimate in a Bloomberg News survey of 24 economists was for an A$11.7 billion gap.
Inflation Threat
The current account is the broadest measure of trade because it includes investment flows as well as goods and services shipments. A deficit represents money Australia has to borrow overseas to pay for the goods and services it imports, and to finance investment not covered by local savings.
``The anecdotes about the economy collapsing are untrue,'' said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney. Still, the ``third quarter will be weaker and that is what the Reserve Bank will be focusing on.''
Stevens and his board signaled last month that they expect Australia's $1 trillion economy to slow enough to cool inflation that surged to 4.5 percent in the second quarter.
A TD Securities Ltd. index released today that measures Australian inflation rose 4.2 percent last month from a year earlier, after climbing 4.6 percent in the 12 months through July.
``Inflation pressures still remain elevated despite the clear slowing in the economy,'' said Joshua Williamson, a senior strategist at TD Securities in Sydney.
``We now seriously doubt the scope for more than two or three quarter-point interest-rate cuts if what we are seeing in the inflation gauge continues to be reflected in the official consumer price index.''
Investors expect Stevens will cut the benchmark borrowing cost by at least one percentage point in the next 12 months, according to a Credit Suisse Group index based on trading in interest-rate swaps at 1:11 p.m. in Sydney.
To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net
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