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Australia Trade Shortfall Widest Since March 2008

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01/08/2013 | 07:19am CEST

--Economists say deficit may have peaked as commodity prices recover

--Others say deteriorating trade balance is a growth risk

(Adds economist remarks from fourth paragraph)

By Enda Curran

SYDNEY--Australia recorded its widest trade deficit in nearly five years in November as a strong local currency boosted imports, offsetting higher revenues from resources exports.

Analysts said the trade shortfall may have peaked, however, as Chinese demand for industrial commodities recovers. China is resource-rich Australia's biggest trade partner.

The trade deficit widened to 2.6 billion Australian dollars (US$2.7 billion) from A$2.4 billion in October, the Australian Bureau of Statistics said Tuesday. It was the biggest monthly shortfall since March 2008.

"The deficit should soon narrow, at least temporarily, reflecting the very sharp rebound in iron ore prices," said Kieran Davies, an economist at Barclays in Sydney.

Global prices for iron ore have risen more than 70% from multi-year lows struck in September last year, triggered by renewed demand from China's steel mills. Shipments of iron ore from Port Hedland in Western Australia, one of the world's largest export terminals for the commodity, jumped by 20% during December alone.

Tuesday's trade data showed shipments of metal ores and minerals, including Australia's biggest export, iron ore, rose by 6% during November. That offset a fall in coal exports.

"The upshot is that despite the poor headline, the details are far more encouraging," said Alvin Pontoh, an economist at TD Securities. "Exports were relatively solid," he added.

Still, other analysts said it will take a sustained recovery in industrial commodity prices for the country's central bank to end a yearlong campaign of interest rate cuts designed to cushion the economy from a fading mining boom.

"Our forecasts for Australia this year present a picture of slowing domestic demand and the need for further Reserve Bank of Australia interest rate cuts to help rebalance the economy," Citi economists said in a research note.

The central bank last month cut its benchmark lending rate by a quarter of a percentage point to 3%, matching a low reached in 2009 in the aftermath of the global financial crisis.

"The weak trade numbers, coupled with a run of poor domestic data, suggests the RBA will need to cut rates further," National Australia Bank Chief Economist Robert Henderson said in a client note. He added that the trade data pose a risk to already weak growth forecasts for the final quarter of last year.

In the latest sign that activity outside of the mining industry remains weak, a private sector gauge Tuesday showed that Australia's construction sector contracted for the 31st consecutive month in December. The Performance of Construction Index, published by the Australian Industry Group and Housing Industry Association, rose 1.8 points from November to 38.8, but remains below the key index level of 50 that indicates construction activity is expanding.

The central bank has been hoping that a string of interest rate cuts totaling 1.75 percentage points since November 2011 will help revive activity in weaker parts of the economy like home building.

Write to Enda Curran at Enda.Curran@wsj.com

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