Australia's Trade Balance Turns to Deficit on Imports

By Jacob Greber

Sept. 4 (Bloomberg) -- Australia's trade balance unexpectedly turned to a deficit in July as oil imports surged and exports fell.

The trade deficit was A$717 million ($596 million) compared with a revised surplus of A$351 million in June, the Bureau of Statistics said in Sydney today. The median estimate of 24 economists surveyed by Bloomberg News was for a A$50 million surplus.

The trade shortfall may slow the economy, which grew at the weakest pace in more than three years in the second quarter as households cut spending. Central bank Governor Glenn Stevens reduced the benchmark interest rate this week from a 12-year high by a quarter point to 7 percent, the first reduction in seven years.

``The deterioration largely reflected higher oil prices and possibly the impact of an explosion at a key gas producer in Western Australia,'' said Su-Lin Ong, senior economist at RBC Capital Markets Ltd. in Sydney.

The Australian dollar dropped to 83.26 U.S. cents at 12:17 p.m. in Sydney from 83.35 cents before the report was released.

The local dollar has slumped almost 14 percent since June 30, the worst performer of the 17 most-active currencies. The two-year government bond yield was unchanged at 5.68 percent.

The falling dollar is pushing up the cost of imports, including gasoline. Imports climbed 4 percent to A$23.6 billion, today's report showed. Fuel imports surged 29 percent.

Exports Drop

Exports fell 1 percent to A$22.9 billion in July as agricultural shipments dropped 3 percent and coal declined 9 percent.

The trade balance may return to surplus in coming months as fallout eases from an explosion in Western Australia that cut off almost 30 percent of domestic gas supplied to that state, which generates about a third of the nation's exports.

Apache Corp.'s Varanus Island plant off the state's coast, which suffered a pipeline explosion on June 3, has resumed 70 percent of the natural gas production, Chief Executive Officer Steven Farris said this week.

The Reserve Bank said on July 15 that the explosion will subtract about a quarter percentage point from gross domestic product.

Today's figures are ``just a blip in the export story,'' said Michael Blythe, chief economist at Commonwealth Bank of Australia in Sydney. ``The trend is still for positive exports.''

Chinese Demand

China's demand for coal and iron ore is helping Australia's A$1 trillion economy outpace other developed nations, which are being buffeted by the global credit squeeze.

The economy expanded 2.7 percent in the second quarter from a year earlier, a report showed yesterday. That compares with 2.2 percent growth in the U.S., 1.4 percent in the U.K. and 1.7 percent in Germany.

Australia's terms of trade, a measure of export income, surged 13.1 percent in the three months through June 30, the most in 35 years, yesterday's gross domestic product report showed. By contrast, household spending fell 0.1 percent, the first quarterly drop since 1993.

BHP Billiton Ltd., the world's largest mining company, last month posted a 30 percent gain in second-half profit.

Rising exports are ``adding substantially to national income and ability to spend,'' Stevens said on Sept. 2.

Business Investment

Business investment rose 5.7 percent in the second quarter, more than twice as much as economists forecast, as mining companies bought extra machinery and equipment to meet demand from China for coal and iron ore, a report showed on Aug. 28.

Increased investment by mining companies is also helping offset weaker consumer spending that may prompt Stevens to cut borrowing costs again this year.

Investors see a 78 percent chance central bank policy makers will cut the benchmark rate by another quarter point at their next meeting on Oct. 7, according to a Credit Suisse Group index based on trading in interest-rate swaps.

Retail sales dropped in June by the most in six years, home-building approvals slumped 2.3 percent in July, the fourth decline this year, and the unemployment rate has climbed to 4.3 percent as companies including Qantas Airways Ltd. fire workers.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net