Australia has blamed a damaging drought for sending its trade deficit ballooning to almost 1bn Australian dollars (�360m; $560m).

Drought will have an effect on growth

Peter Costello, Australian treasurer

The worst drought in a generation will cut this winter's grain harvest by more than half and hit the country's earnings from exports of agricultural products, the government has warned.

Production of the country's four major winter crops - wheat, barley, canola and lupins -is set to fall to 14.8 million tonnes in the year to June 2003, down from a record 34.1 million tonnes a year earlier, according to the Australian bureau of agriculture and resource economics (Abareconomics).

"You're seeing that already and I expect that it will affect exports in future months," said the country's treasurer, Peter Costello.

So far, the drought has cost more than 40,000 jobs. Rural exports have slipped 6% and the trade deficit widened to A$948m in September, the worst figure for more than two years.

Analysts were surprised by the deficit which was much wider than the A$600-650m they had expected.

Strong imports

The Australian people's appetite for imported goods remains strong.

This has further contributed to the wider trade deficit.

Imports of consumer goods rose 5% during September, though imports of capital goods and investment goods fell 2%.

"I would be looking for the deficit to keep expanding over the next few months with exports coming under a little bit of pressure and imports continuing to increase on the back of a strong local economy," said St George Bank senior economist, Tim Crawford.

Economic impact

The drought has also hit the Australian economy at large, shaving 0.7% off the country's economic growth rate, bringing it down to 3.1% from 3.8%.

"Drought will have an effect on growth, it will detract from growth, there is no doubt about that," said Mr Costello.

"We rapidly are seeing the risks to the Australian economy skew to the downside," said SG Australia chief economist, Glenn Maguire.

The economic impact of the drought could prevent the country's central bank from raising interest rates at its next meeting in November.

"Any chance of the Reserve Bank raising rates in the first quarter of next year have to be pushed well back," said Mr Maguire.