Australia's weak currency, weak commodity prices keeping trade deficit elevated

According to the ABS' preliminary estimate, goods imports increased by 0.8% mom in August, which is a pretty strong performance considering recent trends. It is assumed that services imports rose by around 0.5% mom, but these account for only about one-fifth of total imports, and so overall imports would rise by 0.7% mom, leaving them up around 8.2% yoy. That is a pretty strong rate of growth considering the subdued pace of domestic demand growth, but it is largely explained by the fact the Australian dollar was down by 13.5% yoy in trade-weighted terms in August. 

On the export side, some further gains are expected, but not sufficient for exports to regain the level they reached even in February of this year. The main issue is the continued weakness in key commodity prices which are weighing on export revenue. Iron ore prices recovered by 7% in August, but that was only a fraction of the 17% decline they suffered in July (in AUD +9% after -14%). 

Moreover, data on China imports from Australia weakened sharply between July and August, from -4.5% yoy to -29.6%, suggesting that there are downside risks to the forecast for the trade balance. That said, it looks highly likely that net exports will return to making a positive contribution to GDP growth in Q3.