Australian Economic Developments (31/Jan/14)

Australian data released in January 2014 has given some hope of an improvement in business conditions this year, with improvements in indicators of housing construction and in parts of business services. However, the labour market and various indicators of forward demand such as confidence, new orders and capital expenditure continue to exhibit weakness. Significant differences in outlook persist across industry sectors and geographies. Among the largest sectors, mining output and financial services continue to grow, while retail trade and the household-oriented services seem stuck in the doldrums.  Manufacturers are yet to show any material benefit from the lower Australian dollar.

 Business conditions and confidence

The National Australia Bank (NAB) monthly business survey recorded an improvement in business conditions in December, continuing the upward trend of recent months. The NAB business conditions index increased by 7 points to a +4.0 points, the highest reading in more than 2. years (readings above zero in the NAB survey indicate a net positive result). Beneath the headlines however, forward orders remained subdued in December, and there was a rundown in stocks (although this may be voluntary). Capacity utilisation remained relatively low, which will tend to depress capital expenditure. Business confidence was unchanged at a relatively positive +6 points in December, with low interest rates, higher asset prices and a lower Australian dollar helping to support local business sentiment. Employment conditions remain soft, consistent with other measures of labour market demand (such as job advertisements and vacancies). Most services sectors recorded improved conditions in the NAB survey in December, with the exception of retail trade. In contrast, manufacturing conditions continued to decline in December, consistent with the latest findings of Ai Group’s Australian PMI®. Conditions were also reported to be down in the construction and mining sectors, despite healthy activity in residential property markets and robust commodity demand from China. On a state basis, Queensland was the worst performing state in the NAB survey in December (up by just 1 point to – 4 index points). Conditions in Western Australia rose by 17 points, South Australia improved by 11 points and NSW and Victoria both lifted by 7 points.

 Inflation

The impact of a strengthening housing sector was another notable feature of Q4’s CPI data. The housing component, which accounts for 24% of the CPI ‘weighted basket’ rose by 0.5% q/q in Q4 to be 4.3% p.a. higher over the year. New dwelling purchases by owner occupiers (new home sales excluding land) was the main contributor to the rise, recording growth of 1.0% q/q in Q4. There were also solid annual rates of increase within the housing category for property rates & charges (+7.9% p.a.), utilities (+6.8% p.a.) and rents (+3.0% p.a.).

 New home sales

Other data releases this week further confirmed the recent momentum in the housing market. New home sales increased by a seasonally adjusted 6.3% q/q in Q4 2013, to a level not seen since mid-2011 (Housing Industry Association data). This was despite a slight decline of 0.4% m/m in December 2013 which reflected a pull-back in multi-unit sales following a strong result in November (see Chart 2). During 2013 as a whole, new home sales rose by 14.4% p.a.,representing the first year of growth since 2008. By state., growth in detached house sales in Q4 was strongest in South Australia (+50.9% q/q) followed by Queensland (+12.3% q/q), NSW (+3.5% q/q) and Western Australia (+2.3% q/q). In contrast, new house sales decreased by 9.5% q/q in Victoria over Q4 2013.

 Private sector credit

Total credit outstanding to the private sector (owed to banks and other financial intermediaries) also showed the effects of the recent increase in demand for housing. Total credit increased by 0.5% m/m in December 2013, up from 0.3% over the previous four months. Within this total, credit for housing grew by 0.5% m/m in December, to be up 5.4% p.a. This was the strongest annual pace since November 2011. Driving this growth in December was credit for investor housing which increased by 0.8% m/m to be 7.1% higher over the year. This reflects attractive rental returns and the search by investors for capital gains via higher prices. Credit growth for owner-occupiers also picked up, rising from 4.4% p.a. in November to 4.6% p.a. in December. Leading indicators (building approvals and the house building new orders sub-index of Ai Group’s Australian Performance of Construction Index (PCI®) point to further growth in construction related lending in coming months. Other areas of credit growth remain  subdued. Outside the housing segment however, demand for credit remains subdued. Business credit grew by 0.4% m/m to be up by just 1.7% p.a. Other personal