The seasonally adjusted current account deficit was $6.499 billion in the December quarter, narrower from a revised deficit of $9.498 billion in the September quarter, figures from the Australian Bureau of Statistics (ABS) showed today.
The result was better than the median market forecast for a $7.5 billion deficit.
The decrease of $4.208 billion in the deficit on goods and services will add 1.5 per centage points to growth in the December quarter measure of gross domestic product (GDP), the ABS said.
New data released this week gives a mixed picutre of how the economy fared overall in the December.
Construction work done and new capital spending by business was better than expected, but company profits and inventories fell.
Macquarie Group senior economist Brian Redican said the narrowing in the current account deficit provided a "very important offset for that very weak inventory number.''
"The risk of getting a very large negative has been very substantially reduced by the strength of net exports,'' Mr Redican said.
"I think what it does suggest is that the total expenditure on GDP will probably be a small positive for the fourth quarter.
"But we still think that the weakness on the income and production side will probably see the average of those three measures record a small negative.''
Mr Redican said recent economic data have been "incredibly volatile''.
The ABS will release the national accounts figures on Wednesday.
In the September quarter, GDP rose by a slender 0.1 per cent, for an annual pace of 1.9 per cent.
Meanwhile, Mr Redican said a 0.2 per cent increase in retail sales in January also reported on Tuesday, on the back of a 3.8 per cent rise December, showed consumer spending remained robust.
"What it does suggest is that the spending that we did see in December actually maintained its strength in January and that's a very notable outcome,'' Mr Redican said.
"Retail spending is currently about four per cent higher so far in the first quarter of 2009 than it was in the fourth quarter of 2008. That's an extremely strong outcome.''
Mr Redican said he expected retail spending to soften in the period ahead.
"Obviously we would expect it to peter out in February, but the fact that it was able to maintain that level in January is a remarkable achievement,'' he said.
The dollar reacted positively to the data.
The local currency was trading at $US0.6300 just before the data was released at 11.30am (AEDT), but rose to $US0.6313 shortly afterwards.
nabCapital senior economist David de Garis said the retail figures were "pleasing'', and reflected a continuation of the support provided to the sector in December under the federal government's first $10.4 billion fiscal stimulus package.
"That's better than expected and shows again that unlike other central banks and governments where policy has been pushing on a string, in Australia, there has been some traction from policy,'' he said.
"It's not huge but it is positive and has plugged some of the holes that would otherwise have been there.
Mr de Garis also said the 1.5 percentage points contribution to December quarter GDP signalled in the balance of payments report was "huge''.
The Reserve Bank of Australia (RBA) is holding its monthly board meeting ahead of an announcement on interest rates this afternoon at 2.30pm (AEDT).
"For the board, these data swings the balance back toward the no change outcome this afternoon - it's still a very close call,'' Mr de Garis said.
nabCapital has forecast a 50 basis point cut to the cash interest rate.
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