Sept. 1 (Bloomberg) -- Australia's economy probably stalled in the second quarter as the worst drought in a century and a slump in world demand forced exporters such as Bonlac Foods Ltd. to cut production at its factories, economists said. Asia's fifth-largest economy probably failed to grow in the three months ended June 30 for only the second quarter in 10 years, according to the median forecast of 21 economists surveyed by Bloomberg News. Ten say the economy probably shrank. The government releases the growth report tomorrow at 11:30 a.m. Sydney time.
Drought, weaker demand from the U.S. and Japan, and fewer tourists because of the SARS virus and war in Iraq probably combined to stall Australia's economy, which the Paris-based Organization for Economic Development in June forecast would be the fourth-fastest growing of its 30 members this year. ``The drought has hit us hard and left us with less to export,'' Steve Nelson, general manager of milk supply for Bonlac said in an interview from Melbourne.
The company's production was down as much as 20 percent in the second quarter from a year earlier after drought forced farmers to cull cows. Bonlac's profit in the 12 months ended June 30 fell by half as its milk factories ran at three quarters of capacity. The economy probably expanded 2 percent in the second quarter from a year earlier. Australia's economy expanded an average 3.6 percent a year in the five years to March, outpacing average annual growth of 2.6 percent in the U.S. over the same period.
Drought contributed to a 7 percent decline in Australia's rural export volumes in the second quarter from the previous three months and about 27 percent from a year earlier.
Trade Deficit
A slump in exports and gain in imports caused Australia's trade deficit to widen in the second quarter. The bigger trade gap subtracted 1.5 percentage points from gross domestic product, a government report last week showed. The weakening economy may damp speculation the Reserve Bank of Australia will raise interest rates soon. The central bank's board meets to review interest rates tomorrow. The bank will leave the cash rate target unchanged at 4.75 percent for a 15th month, according to all 23 economists surveyed by Bloomberg News. Still, the yield on the March 90-day bank bill futures is trading at 5 percent, signaling investors are betting on a rate increase by early next year.
``Whether we get a contraction in the quarter or not, the bottom line is the economy was weak,'' said Michael Blythe, chief economist at Commonwealth Bank of Australia, the nation's second-largest bank by assets. ``While forward-looking signs for the economy are more encouraging, the new-found speculation about rate rises looks a little rich against this sort of backdrop.''
Tourism Slumps
Also damping the economy in the second quarter, building work completed fell 3.4 percent from the previous three months as non- residential construction dropped. Business investment rose by a less-than-expected 1.6 percent in the quarter, a report last week showed. That signals an increase in capital spending may not be enough to temper falling exports and lower farm production.
A slump in tourism caused Qantas Airways Ltd., the nation's largest airline by sales, to this month report its first loss since selling shares in 1995. The war in Iraq and the SARS outbreak forced it to cancel as many as a fifth of its international flights and cut 2,800 jobs. Helping bolster the economy, business inventories rose 1.3 percent in the second quarter from the previous three months, a government report today showed. Retail sales in the second quarter adjusted to remove inflation surged 1.9 percent from the previous three months as companies such as Harvey Norman Holdings Ltd., the nation's largest furniture and electronics retailer, sold more goods.
Meantime, the outlook is for a pickup in exports as global growth rebounds and recent rain breaks the drought. Companies such as Bonlac say it may be a slow recovery. ``It will take over 12 months for farmers to rebuild their stock,'' Nelson said. ``Cattle are currently in a worse condition than usual and there are lower levels of feed.'' Bonlac is 25 percent-owned by Fonterra Cooperative Group Ltd., the world's biggest dairy company. //www.bloomberg.com