SYDNEY, Sept 4: Australia’s current account deficit narrowed last quarter as rising export volumes gave a lift to economic growth, but the outlook darkened as another iron ore miner scaled back investment plans in the face of falling prices.
The Reserve Bank of Australia (RBA) announces the outcome of its September policy meeting at 0430 GMT and is likely to keep the cash rate at 3.5 percent for a third straight month as it waits for past easing to be fully felt.
Yet pressure for a further cut is mounting as a slowdown in China hits prices for Australia’s major resource exports, stoking concerns that the mining boom is finally faltering.
Earlier on Tuesday, Fortescue Metals Group cut its planned investment spending for fiscal 2013 by $1.6 billion to $4.6 billion, blaming uncertainty over iron ore prices.
‘Prices are staying lower for longer than expected and that’s adding to downside risks for mining investment,’ said Brian Redican, a senior economist at Macquarie. ‘We would look for the RBA to recognise that Chinese recovery seems to have been pushed back.’
The Fortescue news shoved the Australian dollar down to a five-week trough of $1.0224, a move that should actually please the central bank as its persistent strength has sat at odds with the weakness in the country’s commodity prices.
Investors are already wagering the central bank will have to ease at least once by year-end, largely to offset the drag on global growth from Europe and China.
Interbank futures <0#YIB:> put a 76 percent probability on a move in October and are more than fully priced for a cut to 3.25 percent in November. Overnight indexed swaps, which show where the market thinks the cash rate will be over time, put rates at 2.84 percent in 12 months.
Yields on Australian 10-year bonds are already down at 2.97 percent, so it is cheaper for the government to borrow for a decade than banks to borrow overnight.
Market speculation about a cut has only been heightened by a sharp fall in prices for spot iron ore, Australia’s single biggest export earner at over A$60 billion a year.
Prices for the steel-making mineral have tumbled by a third since early July <.IO62-CNI=SI> to reach a three-year low of $88.70 a tonne last week. That has led some miners to shelve plans for more marginal projects and generated much media gloom about an end to the seven-year old mining boom.
Q2 GROWTH STILL LOOKING SOLID
Yet while some commodity prices have been falling, the country has been selling more of the product, and it is export volumes that matter when measuring inflation-adjusted gross domestic product (GDP).
Export volumes rose 3 percent in the second quarter to beat a 2 percent rise in imports, and add 0.3 percentage points to economic growth.
The country’s current account deficit, the broadest measure of trade and investment flows, narrowed to A$11.8 billion, from A$13 billion in the first quarter.
Combined with resilience in household spending and business investment, analysts still expect a robust reading on economic growth for the second quarter due out on Wednesday.
Forecasts are for a rise of 0.8 percent in the second quarter, on top of the first quarter’s resounding 1.3 percent increase. That would leave Australia’s A$1.4 trillion of GDP 3.7 percent higher than the second quarter of last year, easily outstripping much of the rest of the developed world.
Also adding to growth was a surprisingly strong 1.9 percent increase in government spending in the second quarter as public corporations invested more. This could add around 0.5 percentage points to GDP.
Total federal and state government spending amounts to 23 percent of annual GDP and it is the biggest employer with around 1.9 million workers.
Still, fiscal policy is being steadily tightened as the Labor government strives to return the budget to surplus by June 2013, years if not decades before many other rich nations. (AGENCIES)
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