Rise in imports could drag down growth

Australia's imports rose 7 per cent last month, the Bureau of Statistics said yesterday, led by big increases for capital goods, oil and gold. The figures reflect stronger domestic spending on the one hand, but economists said they also pointed to a widening in the trade deficit, creating a drag on national income.

The chief economist at UBS, Scott Haslem, said the higher figure threatened to blow out the trade deficit from $1.7 billion to $2.2 billion for the December quarter.

Due to a quirk in how the national accounts are prepared, this weaker trade performance would detract from economic growth because it lowers net exports (exports minus imports), one of the components of national income.

"Some of our export demand is fading a little and because things have improved domestically and we've have become more confident, we are starting to import more product," Mr Haslem said. "The fact that we've got such an increase in our imports means it's going to detract from our growth."

Mr Haslem estimated that the economy's growth rate rose to 0.5 per cent in the quarter, from 0.2 per cent in the September quarter, as the Government withdrew stimulus spending.

In contrast, a combination of weak import spending and strong exports helped to prevent the economy from shrinking in the March quarter last year.

Yesterday's figures also show domestic demand is returning to health, with a 7 per cent rise in capital imports pointing to strong business investment.

A Westpac economist, Anthony Thompson, said the figures were an early clue that domestic demand was still moving at a strong pace in the quarter as conditions improved. "You're getting a pick-up in import volumes, and that's not surprising, [given] the strengthening backdrop domestically and the strength of the currency," Mr Thompson said.