Record Deficit Fails To Hold Dollar's Charge

Sydney Morning Herald

Saturday January 10, 2004

Matt Wade

A record annual trade deficit has not checked the Australian dollar's march towards the US80 cent mark.

Australia racked up a bigger-than-expected $1.73 billion trade deficit in November, the 19th monthly blow-out in a row, the Bureau of Statistics said yesterday.

In the year to November, the deficit reached $23.5 billion a record high and equivalent to 3.2 per cent of gross domestic product, the biggest shortfall for 17 years.

Investors have often taken a dim view of persistent trade deficits and dumped the currency. But the prolonged slide in the US dollar, which continued yesterday, has meant the Australian dollar has been spared the usual punishment for a weak trade performance.

Early yesterday the currency hit US77.58 cents, a level not seen since March 1997.Many analysts believe it is only a matter of time before it hits US80 cents.

An economist with ABN Amro, Kieran Davies, said the currency market ``doesn't worry that much about the trade figures now days." But he warned that the rapid rise in the dollar would take a toll on exporters.

``The speed of the appreciation of the currency could cause problems for some firms," he said.

The International Monetary Fund warned this week that the massive US trade deficit could trigger a ``disorderly" collapse in the US dollar and destabilise the global economy.

If this happens the local dollar will appreciate further. An analyst with Commsec, Craig James, said the higher Australian dollar would hinder an expected improvement in the trade performance this year. ``The higher dollar raises the price attractiveness of imports while . . . making it tougher for exporters to compete on the world stage."

Economists said the high dollar might have contributed to a 1 per cent fall in exports in November, including a 5 per cent drop in rural exports.

In November the rising dollar also appeared to hurt wine exports, which were down a hefty 27 per cent in the month, in original terms, separate bureau figures showed.

Overall, imports fell slightly, but the import of capital goods rose 8.4 per cent, as the result of aircraft and telecommunications equipment purchases. The acting Trade Minister, Robert Hill, said this was positive for the domestic economy. ``Capital imports reflect business investing in the future, and this will ensure that the Australian economy continues to be productive and competitive."

But Labor's trade spokesman, Stephen Conroy, said the figures revealed structural problems. ``The Government must address this continuing blow-out in the trade deficit."

A separate study published by the bureau yesterday underscored Australia's integration into the global economy. It showed foreign-owned firms made up 1 per cent of Australian firms, but employed one in 10 private sector workers and accounted for 21 per cent of private sector production, excluding agriculture, in 2000-01.

Foreign-owned businesses played a particularly large part in mining and manufacturing. US-owned firms made the biggest contribution to the economy, employing 331,000 workers, although British-owned businesses earned the biggest profits.

Paul Krugman Page 10

© 2004 Sydney Morning Herald

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