Australia: trade deficit narrows in May

Australia's trade deficit in May narrowed to A$807 million (JPMorgan -$885 million, consensus -$1200 million) from A$916 million in April (revised from -A$962 million).

Exports grew for the second straight month, rising a solid 3.0%m/m in May, driven primarily by shipments of non-rural goods (+4.1%). Meanwhile, exports of rural goods and services remained comparatively weak, growing just 0.1% and 1.1%, respectively. Despite the persistently strong Australian dollar, the trade balance will likely improve going forward. Recent rainfalls should help lift rural exports, such as wheat, in coming months, although exports of irrigated crops dependent on the water allocations from the Murray Darling Basin will remain considerably low. Meanwhile, non-rural exports, particularly of commodities, will accelerate on the back of recent increases in mining capacity and the near-term completion of a number of large mining projects. The $23 billion rise in business investment in the mining sector over the past year suggests considerable upside to production and, thus, export growth going forward.

Meanwhile, on the other side of the trade ledger, imports were up 2.3%m/m in May, rebounding from the previous month's 1.7% decline. Imports of capital goods grew at their fastest pace in nearly three years (+12.6%), reflective of the solid levels of business investment in productive capacity. Imports of consumer goods (-1.6%), however, remained weak amid speculation the RBA would lift interest rates in May, while imports of intermediate goods rose mildly (+1.1%). Indeed, the underlying fundamentals supporting domestic demand remain intact. Unemployment remains low, consumer confidence is at a record high, personal income tax cuts came into play last weekend, and fiscal stimulus is growing by the day ahead of the election; thus, demand for imports will remain well-supported in the near-term.

Such developments are indeed encouraging for the nation's economic outlook and should allow net exports, which subtracted 1.3 percentage points from GDP in 4Q06, to add to GDP growth going forward.

* Exports rose 3.0%m/m. Non-rural shipments rose 4.1%, while rural exports rose just 0.1%.
* Imports rose 2.3%m/m due to a solid increase in capital goods (+12.6%). Imports of intermediate goods grew 1.1%, while consumer goods fell 1.6%
* Services debits rose 0.3%m/m, while credits were up 1.1%.

ENDS

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