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UPDATE 1-Australia's trade drags on growth, housing a help
September 2, 2014 / 2:55 AM / in 3 years

UPDATE 1-Australia's trade drags on growth, housing a help

* Current account gap widens to A$13.7 bln in Q2, much as expected

* Net exports take 0.9 ppt off Q2 GDP, govt spending muted

* Economy thought to have grown modest 0.4 pct in Q2

* Strength in home building, prices to support growth in H2

By Wayne Cole

SYDNEY, Sept 2 (Reuters) - Australia’s current account deficit widened sharply in the three months to June as export growth stalled and imports rebounded, a swing that was set to be the single biggest drag on economic growth in the quarter.

Tuesday’s data from the Australian Bureau of Statistics also showed government spending stayed subdued in the second quarter amid much talk of fiscal belt-tightening, pointing to a sub-par performance for the economy as a whole.

But there was better news on the current quarter, with approvals to build new homes surprisingly strong in July as record-low mortgage rates and rising house prices pumped up supply.

The latest rush of data comes just before the Reserve Bank of Australia (RBA) releases the outcome of its September policy meeting at 0430 GMT.

The central bank is widely expected to keep its benchmark rate at 2.5 percent, extending the steady run to over a year, and to signal more of the same ahead as the economy muddles along.

The report on gross domestic product (GDP) is due on Wednesday and signs are it will show a marked slowdown from the first quarter’s surprisingly brisk 1.1 percent growth from the previous three months.

Median forecasts in a Reuters poll favour a rise of 0.4 percent for the second quarter, the smallest in over a year.

“We’re at 0.2 percent for GDP and that’s mainly due to weakness in domestic demand - it feel very much like a low-growth economy right now,” said David de Garis, a senior economist at National Australia Bank.

“But that won’t be any surprise to the RBA. It’s why they should stick with the stable outlook for policy.”

Partly to blame was weakness in consumer spending over April and May, when sentiment was spooked by a government campaign to justify a budget of spending cuts and higher charges.

IMPORTS REBOUND

Australia’s trade performance also turned into a drag after a very strong performance in the first quarter. The current account deficit yawned out to A$13.7 billion ($12.7 billion), from A$7.8 billion, the widest since late 2012.

With export volumes dipping 0.6 percent and imports rebounding by 3.7 percent, trade shaved 0.9 percentage point from GDP in the quarter.

Fortunately that was balanced by businesses rebuilding inventories, which looked to have added a whole percentage point to growth.

Also helping was a revival in home building as low rates and double-digit gains in house prices drive new supply after several fallow years for the sector.

That expansion looked to have a lot further to run, with approvals to build new homes climbing 2.5 percent in July, handily topping market forecasts of a 1.5 percent increase.

That left approvals 9.4 percent higher than in July last year, while growth in houses was even stronger at 14 percent.

Such activity will be very much needed as mining spending is set to fall steeply over the next few years as a decade-long investment boom comes to maturity.

How this handover from mining proceeds is the single biggest uncertainty for policy makers, and a major reason rates are likely to stay low for many months to come.

“The fall-off in investment spending by resources companies has a long way to go yet and will probably accelerate in the coming year,” RBA Governor Glenn Stevens said last month.

“This impending further fall is captivating most of the commentators.” (Reporting by Wayne Cole; Editing by Alan Raybould)

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