Australian exporters feel the crunch as price index slumps

Australian economy, battered by the global recession, has started feeling the crunch as the country's export price index slumped to 4.6 per cent in the first quarter, at its fastest rate of decline since 2003, the Australian Bureau of Statistics (ABS) reported on Friday.

The sharp fall followed the 15.9 per cent gain in the last quarter of 2008. The fall was propelled by the drop in ore and metal prices, which are the primary source of export earnings for the Australian economy, raising concerns about the prospects of a recovery during the year.

Ore and metal prices declined by 27.5 per cent and petroleum products fell by 22.7 per cent during the quarter. However, there was a 15.7 per cent hike in gold prices and a 5.2-per cent increase in coal.

Major export partners, Japan, China and Korea are demanding steep price cuts for iron ore and coal in the forthcoming new contracts due to the slumping global demand.

The import price index too fell during the first quarter although at a moderate pace of 2.8 per cent, as reported by ABS, leading to lower prices of imported goods. It gained 10.8 per cent during the December quarter. The decline was primarily attributed to an almost one-third drop in the prices of petroleum products as well as over 55 per cent slump in the prices of fertilizers.

For the whole year up to the end of March, the export price index was up 42.8 per cent while the import price index was 14.6 per cent higher.

The Reserve Bank of Australia (RBA) estimated a heavy 20 per cent slump in the terms of trade for the year which is expected to increase further by 2010. It is expected that the trade surplus will return to deficit in the coming quarters.

Official inflation figures are expected next week.

Analysts forecast Consumer Price Index (CPI), a measure of inflation, to rise at 0.5 per cent for March quarter compared to a marginal drop of 0.3 per cent in the December quarter.

Inflation is expected to be 2.7 per cent for the full year against the 3.7 per cent in the last quarter of 2008, bringing it within the RBA's comfort zone of 2 to 3 per cent.

Easing of inflation would prompt the central bank to cut interest rates further to stimulate the weakening economy. In April, the RBA cut the interest rates by 25 basis points to 3 per cent, at 49 year low.

China has reported the lowest GDP growth in 10 years, 6.1 per cent in the March quarter which is less than half the 13.7 per cent achieved in 2007, and the US and the Eurozone also registered continuing slump in industrial production for the past few months, all leading to shrinking of demand for Australian products.

The Australian treasurer, Wayne Swan said China's growth report "provides stark evidence of the impact of the global recession on the mining boom, which supercharged Australia's economy in recent years".

Swan warned that the forecasts for economic growth and revenue in his forthcoming budget on May 12 would be "significantly worse" than the previous forecast.

''The simple fact is that a global recession and deep downturns for our key trading partners make it certain that our own forecasts for growth and revenue in the budget will be substantially worse,'' he said.

The growth predicted in the February budget review was 1 per cent in 2008-09 and 0.75 per cent in 2009-10.

Australia's deficit was at $6.5 billion in the December quarter, the lowest since 2003 aided by high commodity prices. The February review forecast the deficit to reach a $35.5 billion in 2009-10.

Analysts now expect that the predictions would become more pessimistic in the coming budget, forecasting recession in the coming year and a deficit touching $50 billion.

Australian government's fiscal year is 1 July to 30 June.