Australian Economic Developments (7 November 2014)

At its November 2014 board meeting last Tuesday, the Reserve Bank of Australia (RBA) kept the cash rate on hold at 2.50%. The cash rate has been unchanged since August 2013 and the RBA continued to signal “a period of stability in interest rates” for the immediate outlook.

Confidence and activity levels remain highly variable across industries in September and October. Residential construction continues to strengthen, but manufacturing and general services activity remains weaker. In the latest labour force data, the monthly unemployment rate, was revised up to 6.2% for September and October, its highest level since 2002. Employment growth remains weak at 1.0% p.a. and the labour force participation rate remains low. More people are now actively seeking work across Australia than at any time since 1997. Underscoring the current weakness in the Australian economy, the ABS this week revised down its estimate of GDP growth for 2013-14 to just 2.5% p.a. (previously 2.9% p.a.). This is well under ‘trend’ growth of around 3% p.a. and well under the growth required to make a dent on the unemployment rate. The downward revision to GDP was largely due to downward revisions by the ABS to household consumption growth, non-mining business investment and even net exports, which were all estimated by the ABS to be weaker in 2013-14 than previously thought.

In line with the soft labour market data this week, several key indicators of real activity in the local economy pointed to a mixed picture in September and October.

Construction Activity

More positively for the domestic economy, the national construction industry expanded for a fifth consecutive month in October, with the seasonally adjusted Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) falling 5.7 points to 53.4 points in October. This signalled a moderation in the industry’s rate of growth, compared to September’s record-high reading of 59.1 points. Across the major construction industry sectors, apartment building activity continued to expand solidly and at a rate that was broadly unchanged from the previous month. This is despite a weakening in new orders for apartments. Continued strength was also evident in the house building sector, although its growth moderated. Commercial construction activity also grew at a slower rate in October, while engineering construction activity contracted for a fourth consecutive month. Survey participants said that the slower pace of growth was linked to an easing in new orders and a corresponding reduction in tendering opportunities during the month. Nevertheless, house builders were generally positive in their assessment of business conditions.

The main factors cited as weighing on activity this month were project completions, sluggish public sector activity and a further winding back in mining related construction work.