Australian Economic Developments (14 February 2014)

Data this week was mixed, with business confidence and housing market data all showing strength while labour force data and consumer confidence data were bleak. The International Monetary Fund also released its regular update on the Australian economy, which was consistent with other official forecasters, predicting below-trend growth through 2014.

Business Confidence

Encouragingly, the National Australia Bank Monthly Business Survey showed both confidence and conditions reported by industry improved in January. Business conditions have steadily risen since the election last September, and in January rose to an index reading of 4, the highest level in three years (Chart 1). Economists at NAB say the improving trend in business conditions suggests underlying GDP growth of around 3.75% in the first quarter, which is well above forecasts.

The manufacturing sector recorded a surprisingly strong turnaround in business conditions in January likely owing to fall in the currency. While this is good news for the sector, the survey did predate the Toyota announcement it would cease local car production in Australia from 2017. Conditions in the construction and retail sectors also improved, while all other industries deteriorated. The NAB economists said the rise in forward orders looked more supportive of better conditions, but capacity utilisation remains below long run averages, and the employment index still suggests a jobless recovery.

Confidence reported by business improved for the first time in four months in January to be above long-run average levels at an index of 8. Confidence is now positive for most industries, although wholesale (a bellwether industry) and mining are both negative. Confidence is generally positive across all states.

Consumer Confidence

Westpac/Melbourne Institute also released its monthly survey of consumer confidence on Tuesday. In contrast to business confidence, the index fell by 3% in February to 100.4, its lowest level since July. Confidence improved initially after the September federal election but in February is now 9.5% lower than the post-election high.

Consumers were particular pessimistic on their expectations for the economy over the next 12 months, which was at its lowest level since March 2012. Households also continue to be very concerned about the labour market, with the index of unemployment expectations now 9.2% above its level in September last year and 7.5% above its level a year ago. Economists at Westpac noted that concerns about May Budget and recent closures by businesses are clearly weighing on household sentiment.

Labour Force data

The national unemployment rate rose to a seasonally adjusted 6.0%, where it last sat in July 2003 (Chart 2). The number of people employed in January actually fell with the economy shedding 3,700 jobs in the month. This owed to a large fall in the number of full-time employed while part-time jobs rose only partially offsetting this. Over the year, the number of people employed across the country rose by just 1,400 people. This is the weakest annual gains in employment since 2009. A broad measure of the labour market, the employment to population ratio, fell to 60.6%. This is the lowest level for this key measure of employment engagement since December 2004. Queensland was particularly weak among the states, shedding around 17,600 jobs over the past year, while its unemployment rate has been steady in trend terms at 5.9% in January, where it sat through most of 2013 reflecting that participation in the labour market has fallen sharply over the past year.

International Monetary Fund Forecasts

The IMF released its regular update on the Australian economy which contained forecasts broadly in line with RBA and Treasury forecasts. Its economists predict growth to rise by a below-trend 2.6% in 2014 as the mining boom fades and growth in the non-mining economy to remain tepid. Importantly, IMF directors stressed that the current outlook showed the Australian economy was vulnerable to the mining sector, and “the transition to a growth path along which investment in mining plays a lesser role presents important policy challenges in the period ahead.”

Residential House Prices

The latest ABS estimates showed another solid quarter of residential property price increase in December 2013 across major capital cities. The weighted average property price index rose by 3.4% q/q in the quarter to be 9.3% higher over the year. This followed quarterly price increases of 2.4% q/q in September and 2.5% q/q in June 2013. These results suggest that a low interest environment and ongoing population growth have continued to drive solid growth in residential property prices.

Housing Finance

The strong growth in residential property prices has also seen a surge in housing finance for owner occupiers over the past year. Despite declining by 1.9% m/m in December, the number of housing finance approvals for owner occupiers were still 14.1% p.a. above the same period a year ago, indicating solid underlying demand for home loans (seasonally adjusted). This strength in loans for owner occupiers was evident in the purchases of both established (up 13.2% p.a.) and new dwellings (up 14.1% p.a.), though both categories softened slightly in December 2013 (number of finance

commitments, seasonally adjusted). On the other hand, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments rose to 12.7% in December 2013 after hitting a record low of 12.3% in November 2013 (in original terms). There have also been positive signs that the increase in property prices and housing finance have led to the prospect of more new dwelling construction. Finance for the construction of dwellings (a lead indicator of dwelling approvals) increased slightly by 0.4% m/m in December, to 14.5% p.a. higher over the year. This was the second strongest annual pace of growth since February 2010. The breakdown by value of home loans also highlighted the continued surge in investor demand for housing. Finance for investment housing rose by 2.9% m/m in December, representing the 6th consecutive month of growth.

Australian Industry Group monthly Indexes

Australian PMI (Jan) manufacturing – 46.7 down

Australian PSI (Jan) services – 49.3 up

Australian PCI (Jan) construction – 48.2 down