Australia has posted its biggest trade deficit in almost a year-and-a-half, due largely to weaker iron-ore prices and a stronger Australian dollar.
The deficit widened to $1.91 billion in May from a revised $780 million the previous month, according to the Australian Bureau of Statistics. (ABS)
The latest deficit was well above the $100 million figure economists had been expecting, while the April shortfall was raised from $122 million as the bureau factored in recent big iron-ore price declines.
Australia, whose US$1.5 trillion economy has expanded for more than two decades, had posted a string of trade surpluses between December and March as resource companies began ramping up production to meet rising demand from China.
The trade balance swung back into deficit in April, however, as the currency rallied and prices for iron, Australia's biggest export, slumped to a 20-month low as more supply came on stream.
An unusually benign cyclone season had also boosted export volumes in the first three months of 2014, contributing to a 1.1 percent quarter-to-quarter rise in gross domestic product.
Long string of deficits
Some economists believe subdued iron-ore prices, coupled with a buoyant Australian dollar that has risen 6 percent this year and is getting close to parity again with the US currency, will continue to weigh on the trade balance.
Big declines last year in the Aussie dollar had the reverse effect – helping to trim a long string of deficits.
The latest trade gap was the worst outcome since January 2013, which was around the time iron-ore prices last plumbed the depths they are at currently, said J.P. Morgan's Ben Jarman, who is based in Sydney.
Mr Jarman said the latest figures confirm the consensus that the trade outcomes recorded in the first quarter were “as good as it gets," he said.
The investment bank this week cut steeply its forecasts for high-quality iron-ore prices over the next few years, as Australian producers push progressively more supply onto the international market.
The Australian Bureau of Statistics said the unexpected size of the May deficit was due chiefly to a 6 percent drop in the value of so-called non-rural exports – which includes commodities such as iron ore, coal and copper.
The decline was exaggerated, as was the April figure, by a downward revision to the value of export earnings to take account of the recent iron-ore price falls.
"This mostly represents delayed recognition of the spot-price falls recorded in prior months," J.P. Morgan's Mr Jarman said. "But the pass-through applied by the ABS still was abrupt."
Some economists say Australia's trade balance may well return to surplus in the coming months if commodity prices stabilise.