AiG Review of Australian Economic Developments (April 4^th)

The RBA kept the cash rate on hold at 2.50% at its April board meeting this week. The RBA remains fairly optimistic about Australian economic conditions over the coming year. The latest data on the  economy continues to be mixed, with the Australian PMI® and Australian PSI® indicating contraction in the manufacturing and services industries in March respectively. More positively, a fragile recovery in residential construction remains evident in some but not all states. The latest count of Australian businesses by the ABS indicates that the total number of businesses registered in Australia fell in 2012-13, the first such annual decline in business numbers since the GFC. The RBA noted that consumer demand has firmed over the past few months and a solid expansion in housing construction is foreshadowed. However, resources sector investment spending is expected to decline significantly and there are only tentative signs of improvement in non-mining investment intentions at this stage. Public sector spending is expected to stay subdued.

The latest Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) declined by 0.7 points in March, to 47.9 points (seasonally adjusted). The Australian PMI® has  signalled contraction in the manufacturing industry since November 2013 (readings below 50 points indicate contraction). Across the manufacturing sub-sectors, four expanded and four contracted in March.

The latest Australian Industry Group Australian Performance of Services Index (Australian PSI®) dropped by 6.2 points to 48.9 points in March. This followed a strong expansion in the Australian PSI® (a reading above 50 points) last month. The weaker result this month was evident across all sub-indexes except the new orders sub-index, which remained above 50 points and indicated expansion. Growth  continued to be concentrated in just a few services sectors, primarily health and community services and finance and insurance, while personal and recreational services (52.5 points) expanded for the first  time since July 2013 (3 month moving averages). The other services sub-sector indexes, including that for retail trade, remained below 50 points in March, indicating ongoing contraction.

Tentative improvement in the construction industry:

Data released this week on the housing industry continue to point towards a fragile recovery in residential construction over the coming months. Engineering construction however, is expected to continue  declining as the mining investment pipeline comes off its recent, extremely high, peaks.

The RP Data Rismark Home Value Index showed that dwelling prices across the five major capital cities rose by 2.3% m/m in March to be 10.8% higher than a year ago. National dwelling prices have risen by a cumulative 15.8% since June 2012, with the majority of that growth occurring since June last year. Sydney recorded the strongest rise in dwelling prices both in the month (up 2.8% m/m) and over the  year to March (up 15.6% p.a.), followed by Brisbane (up 2.8% p.a. but only 5.0% p.a.) and Melbourne (up 2.3% m/m and 11.6% p.a.). RP Data noted that half of Australia’s capital cities are now at record property price levels, with Sydney the most expensive, at 15.8% above its previous peak, followed by Melbourne (4.7% above its previous record), Perth (2.9%) and Canberra (1.2%).

Encouraged by rising house prices, the Housing Industry Association’s (HIA) new home sales index rose by 4.6% m/m in February, following a 0.5% m/m increase in January. Sales of new detached houses went up by 6.9% m/m, though multi-unit sales fell by 6.8% m/m. There is some evidence that the new home sales recovery is starting to benefit all states. Over the three months to February 2014, detached house sales increased in South Australia (32.5%), Queensland (19.8%), New South Wales (6.2%) and Western Australia (5.1%), although Victoria recorded a 10.3% decline in sales due to a weak outcome in December 2013. National multi-unit sales increased by 9.7% over the past three months, despite a decline this month.

Supported by the increase in both house sales and prices, house credit (i.e. borrowings) continued to grow at a strong pace in February. Total housing credit rose by 0.5% m/m in February to be 5.8% higher over the year. Borrowings by investors, which grew by 7.6% p.a. in February, represented a major driver of housing credit growth. Despite a pause in growth in February, in residential building approvals continues to show an upward trend. The number of total dwelling units approved declined by 5.0% m/m to 16,669 in February, after rising by 6.9% m/m in January (seasonally adjusted). However, annual growth in dwelling approvals was still strong at 23.2% p.a.. Annual growth has been above 20% p.a. for six consecutive months now. This suggests that the housing recovery remains intact driven by low interest rates, a steady rate of population growth, solid demand from investors and a housing shortage in most capital city locations.

Housing approvals growth remains mixed across the states with private sector house approvals falling in Queensland (- 15.6% m/m), South Australia (-14.8% m/m) and NSW (-5.8% m/m). In contrast, Western Australia, Victoria and Tasmania experienced rises of 4.6% m/m, 1.9% m/m and 0.6% m/m, respectively.