NO.060

BALANCE OF PAYMENTS – MARCH QUARTER 2005

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

Australia’s current account deficit (CAD) for the March quarter 2005 rose

to $15.6 billion. This reflects an increase in the net income deficit, which

was partly offset by a narrowing in the trade deficit.

The March quarter balance of payments does not incorporate the impact of the

significant increases in iron ore and coal contract prices that took effect

in April 2005. These new contract prices will flow through to export receipts

from the June quarter. As a consequence the CAD is expected to decline in the

June quarter. The mining sector has also made a significant investment in new

capacity, spending more than $25 billion over the past three years. 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.

In the March quarter, the net income deficit rose to $8.4 billion, driven

by high profits earned by foreign-owned Australian based companies, particularly

in the mining sector. The trade deficit fell by $22 million to $7.1 billion,

with solid export growth partly offset by growth in imports.

Export volumes grew by 1 per cent in the March quarter. Exports of metal ores

and minerals grew strongly, while rural exports fell 4.6 per cent in the March

quarter, reflecting the smaller 2004 grain harvest and continuing dry conditions

in many parts of rural Australia. Import volumes grew by 2 per cent in the March

quarter, with imports of motor vehicles making a significant contribution following

the tariff reduction on 1 January 2005. The terms of trade grew by 1.1 per cent

in the March quarter to be 7.6 per cent higher through the year. The increase

in the terms of trade over the past year mainly reflects strong increases in

coal, iron ore and base metal prices. Coal and iron ore price increases will

flow through in the June quarter.

Australia’s net foreign debt rose from $421.3 to $424.7 billion in the

March quarter. The general government share of Australia’s net foreign

debt has fallen sharply since the Coalition Government came to office in 1996

from 17.2 per cent to 4.5 per cent. With the debt servicing ratio currently

at 9.7 per cent of export income, Australia’s ability to service its net

foreign debt is very strong, and certainly much stronger than in the early 1990s

when the debt servicing ratio hit a peak of 20 per cent of export income.

Macroeconomic conditions are more stable now than during previous episodes

of large CADs. The budget is in surplus, government debt is close to zero, the

unemployment rate is at a 30 year low, and inflation and interest rates are

at low levels by historical standards.

31 May 2005

CANBERRA

Contact: David Alexander

(02) 6277 7340