Australian Economic Developments (14 March 2014)

Based on a number of different indices the Australian Industry Group’s assessment of the Australian Economic Developments is attached for your information.

This week’s data showed a more positive trend emerging for labour demand, despite the unemployment rate edging higher. Business conditions plunged again, although confidence has remained relatively high. Consumer confidence fell sharply, possibly owing to recent negative news from Qantas and the automotive industry. The monthly housing finance data continued to show strong demand for new home loans.

Given the positive result for employment this month, the employment to population ratio recovered slightly to 60.9%. Nonetheless, this key measure of employment engagement is still at one of the lowest levels recorded since late 2004. A forward indicator of the labour market, the SEEK index of new job ads placed on its website, was marginally lower in February (-0.9% m/m, +0.6% p.a.). This followed steady growth in the December quarter of 2013 and a 6.1% m/m surge in new job ads in January 2014 (s.a.). The number of new job ads in February were 8.5% above the recent trough in July 2013 but were still 21% below the last peak in April 2011.

Business conditions and confidence

The National Australia Bank (NAB) Monthly Business Survey recorded a sharp downturn in business conditions in February, from the near 3-year highs seen recently. The NAB business conditions index dropped by 5 points to zero this month, indicating a ‘net neutral’ result (zero is the divide between net expansion and net contraction in the NAB survey). Meanwhile, employment conditions also deteriorated significantly, falling by 6 points to -6.0 points in February (and indicating a net contraction), consistent with the soft labour market conditions. Although business confidence eased by 2 points in February, it remained relatively high at +7.0 points. Businesses remain hopeful that lower interest rates and a lower Australian dollar will help lift trading conditions. This outcome re-established the divergence between business conditions and confidence seen in previous months.

In further details from the NAB survey, the forward orders index dropped by 5 points to +1.0 point and pointed towards a subdue outlook over the coming months, while the stocks index suggested another rundown of inventories in February. Capacity utilisation remained at 80.6% this month, its highest level since mid-2012, but the capital expenditure index declined by 1 point to +3.0 points, which is relatively subdued. Among the industries included in the NAB survey, services remain the strongest but transport and utilities showed the biggest improvement in conditions this month.

Consumer confidence, housing finance and holiday departures

In contrast to the relatively solid business confidence levels, the latest Westpac Melbourne Institute Index of Consumer Sentiment showed that consumer confidence declined further to 99.5 points in March from its November 2013 peak of 110.3 points (100 is the divide between net optimism and net pessimism in this survey). While the initial declines in consumer sentiment in December and January reflected an end to the post-election honeymoon period, more recent falls are likely to be in response to the loss of confidence about the domestic economic outlook and job security. News around Qantas, the automotive and other manufacturing industries appear to be weighing on consumer sentiment.

Consumers’ views on the outlook for “economic conditions over the next 12 months” dropped by another 4% to 85.9 points in March, following a 7.1% fall in February. This sub-index is now at its lowest level since December 2011, at the peak of the euro zone sovereign debt crisis. Furthermore, the Unemployment Expectation index rose by 5.5% in the month to 164.4 points, close to levels seen during the GFC and recessions the early 1990s and 1980s. Reflecting such negative sentiment, there was also a large drop in whether it is a “good time to buy a dwelling” in March (down 6.7%), taking the index below its long-run average for the first time since August 2013. This suggests a very uncertain and fragile outlook for a consumer spending-led recovery, and in housing construction.

Indeed, the number of housing finance approvals for owner occupiers was broadly unchanged in January, following a decline of 3.3% m/m in December 2013 (seasonally adjusted). The annual growth rate also moderated slightly from 13.7% p.a. in December to 12.8% p.a., although this is still a strong annual pace and points to solid underlying demand for new loans. Among the housing finance categories, the number of finance commitments for the purchase of established dwellings declined by 0.7% m/m in January but they were still up by 11.9% over the year. Loans for the purchase of new dwellings were also softer in January, declining by 1.0% m/m with annual growth falling back from 13.0% p.a. in December to 7.6% p.a. in January, the slowest annual pace in three years.

On the other hand, loans for the construction of new dwellings (a lead indicator of housing construction) rose by a solid 5.8% m/m in January, the strongest monthly rise since October 2009 and the sixth consecutive monthly increase. The annual pace of growth also strengthened to close to a three-year high of 22.1% p.a.. The number of first home buyer commitments as a percentage of total owner occupied housing finance commitments edged higher again, to 13.2% in January from 12.7% in December 2013 (and a previous record low of 12.3% in November 2013, in original data terms).