AiG – Australian Economic Developments 4 July 2014

At its July board meeting, the Reserve Bank of Australia kept the cash rate on hold at 2.5%, which has been unchanged since August 2013, and the RBA continued to signal “a period of stability in interest rates”.

He noted that considering the likely future trends in the terms of trade, and Australia’s still high costs of production relative to elsewhere in the world, the Australian dollar was overvalued, and “not by just a few cents”. He also cautioned that investors were under-estimating the likelihood of a significant fall in the Australian dollar at some point.

On the effects of the Budget on sentiment, some surveys pointed to a decline in consumer confidence in response to the Federal Budget handed down in early May, while business confidence had displayed no obvious response to the Budget.

 Engineering Construction

Total value of work in the pipeline remains significant in Q1, at $111.2 bn. This indicated that whilst work done will decrease in the year ahead, overall levels of activity should remain reasonably solid and continue to be dominated by large multi-year oil and gas projects. Oil and gas projects accounted for a substantial 71% of all engineering construction work yet to be done in Q11 2014.

Encouragingly, the pipeline of engineering work in railways grew by 13.2% q/q in Q1, reflecting increased public funding for rail projects. These include the $1.6bn light rail project between the Sydney CBD and Circular Quay and the Melbourne Rail Link (estimated to cost between $8.5bn and $11bn). Growth in the amount of telecommunications infrastructure work to be done was also strong, rising by 18.0% q/q in Q1. Higher levels of activity in these non-mining engineering project categories combined with the next wave of major road projects will help to cushion the impact of the continued slowdown in mining construction.

Housing Indicators remain positive although the current cycle might have peaked

The latest RP Data-Rismark Hedonic Home Value Index showed that dwelling prices across the five major capital cities increased by 1.4% m/m in June to be 10.3% higher over the year. This followed a 1.9% m/m decline in dwelling prices in May.

Supporting this view, the number of total dwelling units approved increased by 9.9% m/m (to 16,425) in May, after declining in six of the previous seven months (seasonally adjusted). Annual growth rate for dwelling approvals picked up to 14.3% p.a. in May (0.7% p.a. in April), pointing towards ongoing growth in housing construction activity and housing supply in the near future.

The strong growth in dwelling approvals in May was mainly driven by “other dwellings” (e.g. multi-unit dwellings such as high-rise apartments), which rose by 27.2% m/m (+19.9% p.a.) in May (seasonally adjusted). The relatively stable private sector house approvals also increased in May (+0.5% m/m and +14.3% p.a.) after a 0.5% m/m decline in April. The trend growth in private sector house approvals remains solid, at 16.4% p.a. in May, although this represented a slowdown in annual growth rates from April (18.5% p.a.) and the average of 21% p.a. between December 2013 and March 2014.

Across the states, private sector house approvals rose in Queensland (+45.0% m/m) and New South Wales (+18.7% m/m) (seasonally adjusted). However, approvals declined in Victoria (-8.5% m/m) and South Australia (-6.7% m/m) and were broadly flat in Western Australia (-0.4% m/m).

A high Australian dollar and weak consumer confidence continued to weigh on economic activity in Q2

Despite the encouraging evidence in the residential construction industry, other indicators released this week continued to paint a mixed picture of Australian economic activity in the second quarter of 2014.

This month, many respondents to the Australian PMI® cited concerns about the renewed strength of the Australian dollar, which has increased import competition and lowered demand for locally made products.

Across the eight manufacturing sub-sectors in the Australian PMI®, only the large food and beverages (52.5 points) and the smaller wood and paper products (54.2 points) sub-sectors expanded in June. The metal products, machinery and equipment, and petroleum, coal, chemicals and rubber products sub-sectors all contracted this month (i.e. below 50 points).

Both the production and sales sub-indexes declined into contraction in June, following a brief expansion in May.