Downturn in exports hits growth

Australia pared its economic growth forecast yesterday because of sluggish exports, as expected, but said rising tax receipts would boost the country's budget surplus.

Treasurer Peter Costello, releasing the Government's mid-year review of the Budget, said the outlook for 2004-2005 was still strong despite moderating growth.

He said gross domestic product (GDP) in the year ending June 2005 was expected to expand 3 per cent, down from September's 3.5 per cent forecast.

However, the underlying cash surplus for the year was revised higher to A$6.2 billion ($4.7 billion), or 0.6 per cent of GDP, from September's forecast of A$5.3 billion.

"More money, less growth, as expected," said Michael Blythe, chief economist at the Commonwealth Bank of Australia.

"The damage seems to be mainly from downward revisions to exports ... the failure of our export volumes to respond to what has been the best global backdrop for a couple of decades."

Stephen Roberts, director of research at Grange Securities, said exports had stalled largely because the country was not prepared to meet strong offshore demand for mineral exports.

"It's not lack of demand."

A strong business sector and higher employment had led to the larger surplus, Costello said.

"The improved fiscal position has been essentially driven by strong revenues, principally coming out of strong company profits and increased employment," he said.

The surplus for 2006 was forecast at A$4.5 billion, or 0.4 per cent of GDP, down from A$5.1 billion.

The review forecast state debt would fall to A$19.7 billion, or 2.3 per cent of GDP, in this financial year.

Costello said high oil prices could lower global growth and weaken demand for Australian exports.

The review said the fall in the United States dollar could harm Australian export growth unless it was accompanied by stronger demand in Japan and Europe.

Household spending, which has driven domestic demand, was expected to remain robust, supported by strong income growth and high levels of household wealth.

However, the Treasurer said consumption growth was likely to taper the following year, while the slowdown in housing investment was forecast to remain orderly.

Inflation was set to moderate to 2.25 per cent, compared with September's forecast of 2.5 per cent, Costello said, staying within the central bank's 2-to-3 per cent target zone.

The unemployment rate, which fell to a 27-year low of 5.2 per cent in November, was not likely to vary much, the Treasurer said.

"Employment growth is still looking very strong. That has surprised," said Macquarie Bank senior economist Brian Redican. "The optimistic 2 per cent growth rate there is quite defendable."

The Australian dollar, which reached a nine-month high of 79.47USc in November, was little moved initially by the report. It later firmed to a two-week high of 76.85USc.

The Reserve Bank has held its target cash rate at 5.25 per cent for a year.

- REUTERS