Confirmation this morning of the remarkable turnaround in our trade performance with the June quarter showing the first real tangible fruits of the resources boom in producing a $7 billion improvement in our trade performance and cutting the overall current account deficit for the quarter to its lowest level for three years.

Powered principally by the 86% rise in iron ore export prices and a doubling in the value of thermal coal exports and a 200%-plus rise in the value of coking coal contracts with steel mills around the world, the current account deficit was the best since the June quarter of 2007.

The news won’t influence the Reserve Bank’s decision to cut interest rates tomorrow by at least 25 basis points. The improvement is what the Reserve Bank has been cautioning us about the surge of income expected from the improvement in our terms of trade this year.

The figures reported today could very well be adjusted further as more information comes to light. There have already been significant positive revisions in the monthly figures from the Australian Bureau of Statistics.

The figures on trade, inventories, profits, wages and salaries and sales do not show an economy that collapsed in the June quarter, but the pace of activity did slow.

Figures released this morning from the ABS show that the current account deficit, seasonally adjusted, fell $7.068 billion or a huge 36% to $12.774 billion in the June quarter. That was around $1 billion above some estimates, but that could be easily changed by future revisions.

More stunning was the improvement in the trade account: the ABS reported that surplus (not the usual deficit!) on balance of goods and services of $559 million was a turnaround of $7,872 million on the $7,313 million deficit of the March quarter 2008.

That was the first trade surplus since the March quarter of 2002. It was the largest current account surplus since the big $2.2 billion back in the June quarter of 1997.

The income deficit increased 6% or $797 million to a still too large $13.284 billion. Our net foreign debt fell 1% to $599.935 billion, thanks mostly to the valuation effect from the strong Australian dollar.

That will probably be the low point for a while, given the slump in the dollar since then. It traded around 85.48 US cents this morning, having lost around 8.5% in August against the greenback.

The ABS estimated that the dramatic improvement in our trade performance would detract 0.1% from the Gross Domestic Product numbers when released on Wednesday. That in itself is also a significant improvement as the poor trade performance in the March quarter chopped 0.7% from growth in the quarter. That is a little less than the 0.2% positive contribution estimated from the markets, but economists say that the ABS figure is only an early estimate.

March GDP grew 0.6% for an annual rate of 3.6%. The latest news means that growth may be a bit higher than thought by some: perhaps around 0.3% to 0.4%, which would bring the annual rate down to around 2.8%.

But complicating matters were solid figures for business inventories, up 0.3% in the quarter in seasonally adjusted and wages and salaries, up 2.3%. Sales of goods and services were estimated to have risen 0.4% in seasonally adjusted terms for manufacturing and 1.1% for wholesale.

That there was no sharp rise in inventories could mean that retailers managed not to be caught with unsold stocks by the retailing slump from February-March onwards.

And there was some relatively good news on inflation with the TD Securities/Melbourne Institute Monthly inflation gauge showing a slowing in the rate of price growth to just 0.1% in August from 0.4% in July: the annual rate was still a high 4.2%.

Peter Fray

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