June deficit skewed by investment

By BRIAN FALLOW

Last month's trade figures were unexpectedly bad - but bad in a good way.

Imports exceeded exports by just under $400 million, but they were swollen by record imports of plant and machinery, providing further evidence of the surge in capital spending by businesses. This surge is needed if the inflation-threatening capacity constraints firms are reporting are to be relieved.

Non-transport plant and machinery imports were 30 per cent higher than in June last year, consumer goods 17 per cent higher, and intermediate goods - materials and components used to make other things - 26 per cent higher.

Normally, a trade surplus is recorded in June, and the $399 million deficit largely reversed the positive surprise of a $661 million surplus in May, when exports were strong, although exports were still robust last month, up 19.5 per cent on a year ago.

Exports for the June quarter were up 16.8 per cent on the same period last year, outstripping a 13.5 per cent increase in imports.

Deutsche Bank economist Darren Gibbs said two-thirds of the increase in exports reflected higher volumes, rather than price or exchange rate movements.

"And it's not just commodities. Meat and dairy volumes have been very good and I think we will see a reasonable bounce back in the forestry sector now that production is being ramped up to meet higher prices.

"But we are also seeing a strong increase in exports on the manufacturing side, and we know it's not prices because there is no pricing power there."

The June quarter showed a trade surplus of $71 million, small compared with $820 million in the June 2002 quarter and $1.1 billion in June 2001, but still an improvement on last year's $153 million deficit.

For the year ended June, the trade deficit was $3.4 billion, down from $3.9 billion in May and $3.7 billion in April.

"The trade deficit has probably peaked," Gibbs said.

A sharp improvement in the terms of trade (the quantity of imports that can be financed by a fixed quantity of exports) had offset the fall in net export volumes arising from strong import demand.

"There are no obvious signs that these very good commodity prices are going to fall back any time soon.

"So the current account deficit will probably remain around 4 per cent of GDP for the rest of the year, which is within manageable levels."