Australia's trade surplus narrows to $3bn in February

Australia's goods trade surplus came in sharply below expectations to $3bn ($2.97bn) in February, its narrowest since August 2020. A 3.6% fall in exports was the weakest outturn in 5 months and came on the eve of the Trump Administration's 'liberation day' announcements of global tariffs, which included a 10% tax on Australian goods entering the US and an embargo on domestic beef. Imports lifted 1.6% on the month to press new record highs.     

The surplus on goods trade narrowed from $5.2bn in January to $3bn in February, well below the $5.4bn figure expected. Although narrower trade surpluses have prevailed over the past 12 months, the February result was a step down from that. Off the back of this latest result, the 3-month average for the trade surplus narrowed from $5.4bn to $4.3bn - its lowest level since November 2020. 

Exports in the month declined by 3.6% to $42.3bn, a 6.6% fall across the past 12 months. The main movement in February came from non-monetary gold falling 21.4%, partially reversing its surge to record highs in January (78.6%) with market volatility and economic uncertainty fuelling demand. Non-rural goods fell 2.3% on weakness in iron ore (-2.9%) and coal (-6.7%).  

Rural goods advanced 4.4%, the notable movement coming in meat exports (19.7%) on some likely front-running of the Trump Administration's embargo announcement. Cereal exports (2.7%) rose for the 5th month in succession.    

As a side note, Australian exports to the US pulled back slightly in February following their surge in January, with orders brought forward ahead of liberation day.  

Imports in February posted a 1.6% rise to $39.3bn, a record high. Capital goods rose 3.6% while consumption goods saw a 1.2% lift. Meanwhile, despite a large decline in fuel imports (-14.8%) on the back of lower oil prices, intermediate goods were flat in February. Offsetting gains came through in industrial supplies and capital goods parts.    

Australian dwelling approvals -0.3% in February

Australian dwelling approvals were broadly flat in February (-0.3%) against expectations for a larger decline (-1.5%) following gains through December (1.5%) and January (6.9%). Approvals have trended higher over recent months, underpinned by the higher-density segment as high rise approvals have lifted in Sydney and Melbourne. Higher interest rates have weighed on home building activity over the past couple of years; and while the RBA has started easing policy, this will take time to flow through to the sector.   

February dwelling approvals (16.6k) were broadly unchanged from the prior month, at levels up more than 25% on 12 months ago. Approvals lifted by 8.5% across December and January, and with those gains, the 3-month average to February lifted to 16.3k - a high back to October 2022. However, seasonal effects potentially overstate the underlying strength and, as seen in today's result, some softer prints could now follow.    

Detached approvals were near-steady in February (0.2%) at 9.3k on a seasonally adjusted basis. This segment has seen a moderate rise over the past 12 months of 5.2% and the level remains low relative to the series history - particularly when considering the strong rate of population growth over the past decade. Notably in New South Wales and Victoria, house approvals have settled at levels below their ranges that prevailed in the years before the pandemic. 

Higher-density approvals saw a 0.9% decline in February, easing to 7.3k. This segment has driven much of the recent uptrend in approvals; higher-density approvals are up 67.5% across the past 12 months from levels near cycle lows. The major driver of this strength looks to have been in the high-rise category, mainly in Melbourne and Sydney.  

The value of residential alteration approvals (for house renovations) was 0.3% softer in February, with the level remaining elevated at just below $1.2bn. Meanwhile, non-residential approvals (-16.5%m/m) are showing signs of seasonal volatility - these approvals rose by 39% over November-December but have since fallen by 35% through January-February.   

RBA leaves cash rate steady in April

The RBA left the cash rate unchanged at 4.10% today (ES rate 4.0%). With the economy and inflation tracking broadly in line with the forecasts published just a little over a month ago, back-to-back cuts were never in contention. A rate cut is nearly 80% priced at the next meeting on May 20, but with underlying inflation still above the 2-3% target range and the labour market remaining robust, Governor Bullock again pushed back on market pricing for an easing cycle that discounts the cash rate to around 3.5% by year-end. 

Today's statement from the Board maintained the same key themes as in February: underlying inflation is moderating; the outlook remains uncertain; and sustainably returning inflation to target is the priority. Increased confidence that underlying inflation is returning to the 2-3% target opened the door to the cut in February and that progress has since been validated as the trimmed mean eased to 2.7% in the monthly CPI series. However, the Board is understandably cautious on the eve of the Trump administration announcing a swathe of trade tariffs.

In the post-meeting press conference, Governor Bullock said the RBA had been working through a range of scenarios to map out the likely impacts on Australia from a global trade war. In that event, growth was expected to be weaker but the effects on inflation were not clear. A new line was added into today's statement that noted 'monetary policy is well placed to respond to international developments if they were to have material implications for Australian activity and inflation'. 

Aside from the uncertainties offshore, domestically the RBA has question marks over how the labour market will evolve and the recovery in household consumption as cost-of-living pressures subside. Last week's federal budget included measures to ease those pressures and, while they were largely an extension of existing policies (energy bill rebates and tax relief), Governor Bullock saying that the Board considered those measures to be 'a wash' as they had largely been factored into the February forecasts should have raised a few eyebrows. The continuation of the energy bill rebates for an additional 6 months for example will have what the RBA would call 'mechanical effects' on inflation - holding it lower for longer before rising later on - and this cannot have been incorporated into the forecasts since the policy was only announced last week. 

The closing paragraphs reaffirmed the Board is taking a data-dependent approach to policy given the uncertainty around the outlook. In practice, this means the data that will come to hand over the coming weeks - wage and inflation updates for Q1 and additional labour market reports in particular - will be key to seeing the rate cut that is largely priced in for May delivered.