trade surplus surges $3.5b thanks to iron coal, page-2

Published 11:39 AM, 4 Aug 2010 Last update 1:41 PM, 4 Aug 2010


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Reuters, AAP with a staff reporter

Australia's trade surplus ballooned to a record in June as export earnings from iron ore and coal surged, lifting the local Australian dollar and acting as a reminder of why the next move in interest rates is still likely to be up.

The surplus of $3.54 billion was almost twice the market forecast and far outstripped the previous record of $2.5 billion.

The surplus for the three months to June amounted to $6.6 billion, a turnaround of almost $10 billion from the first quarter's deficit and a boon for economic growth.

A government measure of city house prices also showed brisk growth of over 18 per cent for the year to June, a worry for the Reserve Bank of Australia (RBA) which has been hoping higher mortgage rates would cool the red-hot sector.

"The trade numbers are just massive," senior economist at RBC Capital Markets Su-Lin Ong said.

"That's a lot of income flowing into the economy and we could well see nominal GDP (gross domestic product) growth in double-digits."

"It's also coming while the labour market is already strong and unemployment low," she added.

"It means the bias is still for higher interest rates down the track."

The central bank left rates unchanged at 4.5 per cent at its monthly policy meeting on Tuesday, and investors are wagering it will stay on hold well into 2011.

The market is implying almost no chance of a hike to 4.75 per cent in September and October and only 15 basis points of tightening in the next 12 months.

But with the country's commodity exports benefiting so greatly from demand in China and India, analysts suspect rates will have to head higher at some point.

"The RBA is unlikely to be on the sidelines for long in an economy with 9-10 percent nominal GDP and inflation in the upper half of the target range," UBS chief economist Scott Haslem said.

Trade bonanza

"If the past is any guide, the money from trade will eventually leak into the broader economy via higher investment, jobs growth, wages and dividends," Mr Haslem said.

Exports climbed 7.1 per cent alone in June, to rise 32 per cent from the same month last year. In contrast, imports rose just 0.2 per cent in June.

Iron ore and copper exports jumped 23 per cent in the month, while coal rose 15 per cent rise in coal and cotton more than doubled.

Contract prices for iron ore and coal have surged this year thanks to demand from China and India, where more than two billion people are industrialising at breakneck pace.

As a result Australia's terms of trade, or the ratio of export prices to import prices, could rise 20 per cent this year.

The RBA's own index of Australian commodity prices climbed 50 per cent in the year to July to the second highest on record.

Export volumes also looked to be higher for the second quarter, implying trade could make a significant contribution to GDP growth after several quarters of drag.

It should also see Australia's perennial current account deficit shrink markedly in the quarter, making it less vulnerable to swings in global financial sentiment.

All of this will shower money on the economy at a time when the jobless rate is already down to 5.1 per cent and nearing lows that have sparked inflation in the past.

"It looks like the economy was firing on all cylinders last quarter," senior economist at ICAP Adam Carr said.

"The boost to the terms of trade just shows why Australia is so strong compared to the rest of the developed world."

"It also means the next move in rates is up, the only question is when."

JP Morgan economist Ben Jarman said analysts had not forecast anything like the doubling of the trade surplus .

"It's pretty much double what the market had in terms of size and surplus so it's a very big number," he said.

"Iron ore and coal in particular spiked quite significantly, although we are still getting the benefit of the higher prices that came through in April."

He said it was hard to see any more upside from the number.

"Certainly it's a good result and its a number that flows through to pretty solid gains in national income."

Home prices lift

Elsewhere, Australia's established house price index lifted a higher-than-expected 3.1 per cent in the June quarter, taking the yearly rise to 18.4 per cent.

This compared with a downwardly revised 4.2 per cent in the March quarter.

Economists interviewed by Reuters had tipped a 1.8 per cent quarterly rise for detached houses.

Mr Jarman said the all of the other indicators, such as building approvals and home loans, were showing that the housing market has hit a patch of weakness.

"We're just waiting for the house price data to come out and reveal that," he said.

"The three per cent here probably understates the downshift in momentum we're seeing in the housing market."

New vehicle sales jump

In other economic data, new vehicle sales lifted more than nine per cent in July, driven by strong demand from private buyers and sustained interest in four-wheel drives, according to data from the Federal Chamber of Automotive Industries (FCAI).

The FCAI said 82,376 passenger cars, 4WDs and commercial vehicles were sold in July, a rise of 9.3 per cent compared to the same period in 2009. This compares to annual growth of 5.7 per cent in June.

Seasonally adjusted, VFACTS estimated sales fell 4.6 per cent in July, from June.

FCAI chief executive Andrew McKellar said the result was even more impressive given the start of a new financial year usually resulted in slower sales.

These figures provide further evidence that sales to private customers continue to increase strongly recording a 20 per cent rise compared to this time last year, Mr McKellar said.