Recession fears as trade deficit blows out

Falling commodity export volumes and a shock rise in capital good imports in October blew out the trade deficit and increased concerns about a recession.

An unexpected widening of the trade deficit has increased the chances of a recession, economists warn.

Imports rose two per cent while exports rose just one per cent in October, blowing the deficit out to $1.54 billion, according to the Australian Bureau of Statistics.

The deficit is significantly larger than the $700 million the market had forecast for the month, and comes after weak export volumes contributed to a slump of 0.5 per cent in September quarter gross domestic product (GDP).

Capital Economics chief economist Paul Dales said it is now more likely that net exports will be a drag on economic growth in the December quarter as well.

"After yesterday's news that GDP contracted in the third quarter, this means the chances of a recession (two consecutive quarters of falling GDP) have just increased," he said in a note.

St George senior economist Hans Kunnen said another big contributor to the deficit was a 9.5 per cent increase in imports of capital goods, which are used in the manufacture of other goods.

"Given that major resource projects have been or are close to completion, this surge came as a surprise," he said.

"A silver lining in this figure is that, over time, the capital goods should lead to increases in output and potentially, exports."

Royal Bank of Canada strategist Michael Turner said sluggish export volumes in the early part of the December quarter would make it hard for the economy to bounce back from its contraction in the September quarter.

He expects the production of large amounts of LNG to significantly add to export growth in coming years.

"For now, however, growth is clearly running at a sub-par rate," Mr Turner said.