China affecting Aussie exports

Depressed commodity prices and slowing Chinese demand continue to weigh on Australian exports, Forsyth Barr broker Peter Young says.

Economic activity remained sluggish but a softer Australian dollar was helping keep inflation within the Reserve Bank of Australia's 2%-3% target, he said.

The RBA kept its interest rate unchanged this week on 2%.

''While growth has remained below trend for some time, the labour market has held up better than expected.''

Australia's current account deficit widened 40% in the three months to June, which was reflected in the June quarter gross domestic product (economic growth) slowing to 0.2% from 0.9% in March.

The deficit on goods, services and capital widened to just above $A19 billion ($NZ21billion) in the June quarter and from $13.5billion in January to March.

Within that data, the trade deficit more than doubled, while the net goods and services surplus fell 28%. Iron ore export volumes were at a record high but prices remained depressed, Mr Young said.

''Net trade could be a drag on output for some time yet.''

With economic growth remaining below trend, underlying inflation pressures remained well inside the bottom half of the RBA's target range.

The RBA was happy to take a wait-and-see approach with regards to the weaker global environment for commodity prices and trading partner demand, as well as domestic inflationary pressures, he said.

The statement accompanying the cash rate review said the economy had spare capacity and that would restrain inflationary pressures - even with a much lower Australian dollar.

Credit growth remained moderate and the current monetary settings should encourage further borrowing and spending. That had been reflected in solid retail sales and car sales, while building approvals had softened in recent months, Mr Young said.

The key risk to the Australian economy remained the slowdown in China. With 35% of its net exports going to China - about 5% of GDP - the challenge for Australia was to reorient the economy domestically at a time when the manufacturing sector needed to be rebuilt and minimal financial support would be available for at least a decade.

''This will require a very accommodative RBA and the better money remains on further easing in monetary policy.''

Household debt ratios remained at historic highs. The over-indebted consumer would delay the required economic transition and further underpinned the need for the RBA to retain a ''very accommodative stance'', he said.



Key risks to the Australian economy
- Ongoing slowdown in China affecting demand for Australia exports.
- Weak employment growth slowing the boost to domestic demand.
- Disorderly sell-off in global rates if US rates normalised faster than expected. 




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