Australia's trade deficit blew out unexpectedly in October

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Australia’s trade deficit blew out out unexpectedly in October, bucking expectations for a sharp narrowing, or even a surplus, on the back of surging commodity prices.

According to the ABS, a deficit of $1.541 billion was recorded, $269 million larger than the upwardly-revised $1.272 billion figure of September.

It was the first increase in the deficit since June this year, and was well above the $800 million figure that had been expected by economists.

The value of exports rose by 1% to $27.631 billion while imports jumped by 2% to $29.172 billion.

On the export side of the ledger, the ABS said the value of non-rural goods rose by $223 million while non-monetary gold increased by $198 million. That was partially offset by a decline in the value of rural goods of $150 million.

Within non-rural goods — the largest component within exports — the ABS said the value of coal, coke and briquettes rose by $241 million while those for other mineral fuels (LNG) increased by $231 million. That was partially offset by a decline of $95 million and $96 million respectively for metal ores and minerals and metals excluding non-monetary gold.

The main drag on rural goods exports was meat and meat preparations which fell by $89 million.

Services exports rose by $121 million.

For imports, the value of capital, consumption and intermediate and other merchandise goods goods rose by $490 million, $100 million and $97 million respectively. Non-monetary gold imports bucked the trend, sliding by $126 million.

Services imports increased by $135 million.

This table from the ABS shows the breakdown by category:

Tapas Strickland, an economist at the NAB, suggests that the blow out in the deficit was largely explained by two factors: a surge in capital goods imports and delay in higher commodity prices flowing through to the export values.

“Around half of the underperformance is attributable to a surge in capital imports which rose $0.5 billion or 10% in the month,” he said.

“The other half likely represents delays in receiving higher prices for coal and iron ore, and strangely the statistician reported the price paid for Australia’s iron ore exports fell 3-4% in the month.

“This is contrary to recent price moves and thus revisions are highly likely to today’s figures.”

He also notes that the surge in capital goods imports bodes well for business capital expenditure in the fourth quarter.

“The most interesting observation was the increase in capital imports which are typically used in business investment so at the margin may indicate a more solid investment figure next quarter after September quarter’s weak rain affected read,” he said.

However, as pointed out by Scott Haslem, chief economist at UBS in Sydney, that optimism was somewhat counteracted by a continued decline in export volumes.

“The volume of resource exports leaving our shores appears to have continued Q3’s weakness, falling even more sharply at the start of Q4,” he said.

Haslem says the “data sets a high benchmark for a November/December rebound in export volumes”, noting that it’s an important driver behind his expectation that GDP will rebound in the fourth quarter.

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