NO.074

BALANCE OF PAYMENTS – JUNE QUARTER 2005

Data released this morning by the Australian Bureau of Statistics show that

Australia’s current account deficit (CAD) for the June quarter 2005 narrowed

significantly, falling by $2.4billion to $12.6billion, reflecting falls in

both the trade and net income deficits.

The trade deficit fell by $2billion to $4.9billion, its lowest level since

the March quarter 2003. The June quarter balance of payments incorporates the

impact of higher iron ore and coal export contract prices that took effect on

1April2005, underpinned by strong global demand for Australia’s commodity

exports. Increased contract prices will continue to flow through to higher export

values in the September quarter 2005, being the first full quarter in which

the higher prices will apply to all contracted exports. In line with higher

bulk commodity export prices, the terms of trade grew by 5.8percent in the

June quarter to be 11.5percent higher through the year, and are now at their

highest level since the March quarter 1974.

Responding to strong global demand for commodities, Australia’s mining

sector has made a significant investment in new capacity over the past three

years, spending more than $27billion. These increases in production capacity,

combined with measures to alleviate transport bottlenecks at key ports, will

see mineral export volumes grow strongly over 2005-06.

Abstracting from price effects, export volumes grew by 1.6percent in the

June quarter and have increased by 1.9percent over the last year. Exports

of non-rural goods grew by 2.6percent, with transport equipment, other manufactures

and metals excluding gold showing the strongest growth. Rural exports grew by

3percent, led by wool and sheepskins, and other rural goods. This increase

came despite lingering effects of dry weather continuing to limit exports of

cereals and grain products.

Import volumes grew by 2percent in the June quarter, with imports of fuels

and lubricants growing strongly due to higher imports of diesel and other crude

oil related fuels and lubricants. Capital good imports also grew strongly as

businesses continue to invest in new IT, plant and other equipment.

Australia’s net foreign debt was $430billion in the June quarter. The

general government share of Australia’s net foreign debt was a low 5.3percent

in the June quarter. The debt servicing ratio is currently at 9.5percent of

export income compared with the peak in the early 1990s when the debt servicing

ratio hit 20percent of export income.

The growth in Australia’s net external liabilities over the last decade

has coincided with a period of sustained economic strength. The budget is in

surplus, government debt is close to zero, the unemployment rate is at a 28-year

low, and inflation and interest rates are at low levels by historical standards.

It is only through careful economic management and maintaining the impetus for

reform that the Australian economy will continue to record sustainable growth.

31August 2005

MELBOURNE

Contact: Amanda Kennedy

03 9650 0244