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Policy Hub: Macroblog provides concise commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues for a broad audience.

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June 1, 2005

Another Record Current Account Deficit -- No, Not The U.S.

From the Wall Street Journal (page A18 in the print version):

Australia's current-account deficit widened to a record A$15.65 billion (US$11.82 billion) in the first quarter, sending an already shaky Australian dollar even lower...

Australia's current-account deficit reached more than 7.2% of gross domestic product. The current account is one gauge of a country's balance of payments of all its international transactions, public and private, and provides the broadest measure of trade in goods and services and investment earnings.

While Australia's trade deficit narrowed slightly during the quarter, the improvement wasn't enough to offset a widening of the net-income deficit that measures capital flows.

Meanwhile, the Financial Times reports on a disappointing GDP report:

The Australian economy rebounded to expand by an annualised 1.9 per cent in the first quarter but the improvement was weaker than expected and may be short-lived because it was fuelled by a build up in inventories.

Data released Wednesday showed gross domestic product rose 0.7 per cent in the first three months of the year, up from 0.3 per cent in the fourth quarter, a revision from the 0.1 per cent initially announced.

First quarter growth was ahead of the annualised rate of the 1.5 per cent recorded in the previous quarter but below the 2.2 per cent expected by economists who had targeted an upturn of 0.9 per cent for the quarter...

The data confirms that Australia whose economy is in its 14th consecutive year of expansion has entered a period of economic underperformance.

The slowdown in growth, which has averaged more than 3 per cent a year over the past decade, contrasts with the 3.7 per cent and 2.7 per cent recorded in the US and UK respectively in the first quarter.

Naturally, the commentary turns to the dilemma this poses for the central bank:

... the weakening data means the Reserve Bank is unlikely to raise rates in the near term, with economists almost unanimous that it will not act after its upcoming monetary policy meeting.

The bank raised rates for the first time in over a year in March, to 5.5 per cent, and, with inflation creeping towards the top of its 2 to 3 per cent target range, has suggested it may need to act again.