AUSTRALIAN ECONOMIC REVIEW

The Queensland turf production industry invests in turfgrass approximately 6 months prior to demand. As the critical supply chain to many pillar industries it is important that turf production sector are kept up to date with what is happening across the country and the pressure points from overseas that make things happen in Australia. The latest economic report from the Australian Industry Group has been reduced to highlight the relevant issues.

International economic developments

Stronger than expected data associated with the manufacturing sectors in Europe and the US supported an improvement in market sentiment this week. However, this was mitigated somewhat by key data pointing to a slowing in China’s manufacturing growth amid soft global demand and tightening liquidity conditions. Political instability in Egypt and Portugal also weighed on sentiment.

CHINA

In China this week, the HSBC/Markit Manufacturing PMI for China (which is mainly representative of small and medium sized manufacturers) registered 48.2 points in June, its second consecutive month below 50 points (indicating net contraction). It was also the lowest reading for this index in nine months. Chinese manufacturing production, new orders, exports and employment all registered a contraction in June. The separate official PMI survey (mainly representative of larger and state owned enterprises) showed Chinese manufacturing activity holding above the 50-point threshold, although the index declined to 50.1 in June from 50.8 in July. Moreover, the forward looking expectations sub-index fell by 2.2 points to 54.1 suggesting sluggish conditions in the Chinese manufacturing sector are likely to continue.

EUROPE

An improvement in business conditions in Europe was highlighted in the Eurozone manufacturing purchasing managers’ index (PMI), which came in at 16-month high of 48.8 in June (up from 48.3 in May). Nevertheless, the PMI for June signalled that the contraction in manufacturing across the euro area has extended to a 23rd consecutive month. Both output and new orders declined at slower rates in June leading to the slowest pace of job losses since March 2012. Only the German PMI failed to rise in June. Ireland saw a marginal improvement in manufacturing conditions and Spain experienced a stabilisation, while rates of contraction eased in France, Italy, the Netherlands, Austria and Greece. In other positive data, Eurozone retail sales rose by 1.0% m/m in May (the first rise in four months), with a rise of 0.8% m/m in both Germany and France and an unexpected 1.2% m/m increase in Spain. Despite the improvement, risks to the outlook for the Euro area remain on the downside with the European Central Bank (ECB) having recently downgraded slightly its GDP growth projection for 2013 to -0.6% p.a., although growth is expected to recover to a 1.0% p.a. rate in 2014.

USA

In the US, there was positive news this week for manufacturing, with the US Institute for Supply Management index of national factory activity rising to 50.9 in June from 49.0 in May, a slight recovery after May’s 1.7 point decline. It represented growth in the US manufacturing sector for the fifth time in the first six months of 2013, with new orders, production, supplier deliveries and exports all showing improvement in June. Adding to the positive news, US expenditure on construction increased by 0.5% m/m in May to its highest level in nearly four years. The residential market continues to drive much of the recovery, highlighted by a 1.2% m/m pick-up in residential spending which helped to offset a fall of 1.4% m/m in non-residential outlays. And in a sign of improving consumer confidence, new car sales rose in June to be up by 9.1% p.a. on a year earlier, the strongest annual rate since November 2011. In US labour market data, private-sector payrolls in the US rose 188,000 in June (led by small businesses and the service providing sectors) while initial jobless claims fell by 5,000 to 343,000 in the final week of June, pointing to continued modest job growth.

Australian economic developments

As widely expected, the Reserve Bank of Australia (RBA) left the cash rate on hold at 2.75%, at its monthly (JUNE)Board meeting. In the accompanying Statement by RBA Governor Glenn Stevens, the RBA left the door open for further rate cuts this year if needed, stating that “the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand” On current conditions, the RBA notes that: Australian growth is “a bit below trend”; the “unemployment rate has edged higher”; the “growth in labour costs has moderated” and the rate of inflation is “consistent with the medium term target”. The RBA also believes that interest rate cuts made so far since 2011 have supported “interest–sensitive spending and asset values” with signs of “increased demand for finance by households”. With respect to the Australian dollar, the RBA points to the possibility of further depreciation over time to assist with the transition to non-mining led growth.

The national construction industry

Construction generally continued to decline in June, although the rate of contraction was the slowest in four months. This reflected less pronounced declines in activity, employment and deliveries from suppliers in line with an improvement in new orders across most sectors. The seasonally adjusted Australian Industry Group/ Housing Industry Association Australian Performance of Construction Index (Australian PCI®) increased by 4.2 points to 39.5 in June. The index has now remained below the critical 50 points level (that separates expansion from contraction) for 34 consecutive months. By sector, declines in house building, apartments and commercial construction activity were all markedly slower in June. Engineering construction was the weakest performing sector with activity constrained by a particularly steep fall in new orders. Despite reports of an improvement in the uptake of new work in the month, the industry continues to face a tough environment with a number of respondents citing the negative influences of project delays, tight credit conditions, low consumer confidence and weaker mining-related construction work.

Mining Investment

Reflecting the approaching peak in mining investment, the ABS data showed that the pipeline of work in the oil, gas, coal and other minerals (or mining) sector fell by 1.8% q/q in Q1 2013 after registering declines of 13.0% q/q and 6.3% q/q in Q4 2012 and Q3 2012 respectively. Declines in work yet to be done were also recorded in sectors with strong links to resource investment including roads (-15.8% q/q), rail (-29.2% q/q) and other heavy industry (-12.7% q/q). Encouragingly, there were areas of non-mining work that showed reasonable growth in work yet to be done Q1 2013, including sewerage and drainage (+15.8% q/q), bridges (+8.8% q/q) and pipelines (+8.2% q/q). While the pipeline of telecommunications work declined by 2.0% in Q1 2013, annual growth was solid at 71.2% p.a. reflecting strong NBN-related investment. Higher levels of activity in these areas will help to cushion the impact of the slowdown in mining construction.

Housing Sector

The latest housing market data indicates that a housing recovery is still underway, assisted by low interest rates. Despite an easing in the pace of growth, the trend in housing approvals remains positive. The seasonally adjusted number of total dwelling units approved declined by 1.1% m/m (to 13,781) in May after a 9.5% m/m increase in April. The decline in May was broadly in line with market expectations. May’s decline was driven by a decrease in private sector “other dwellings” (units, townhouses, etc) which fell by a seasonally adjusted 9.8% m/m. This follows a 17.9% m/m increase in April, highlighting the volatility of this segment. Private house approvals increased by a seasonally adjusted 2.5% m/m in May after a 2.9% m/m rise in April. Approvals for private sector houses in May are now 11.7% p.a. higher than a year ago (down from a 19.1% p.a. annual rate of growth in April). The trend in house approvals remains positive (up by 1.5% m/m and 9.9% p.a. in May), indicating that the recovery remains intact. However, the annual rate of growth (in trend terms) is the lowest in eight months. This suggests that the strength of improvement in aggregate housing activity is modest.

State results (in trend terms) point to stronger upturns in total approvals in Western Australia and South Australia where annual growth rates were 32.4% p.a. and 21.0% p.a. respectively. This was followed by Queensland (9.5% p.a) and New South Wales (12.9% p.a). Annual growth in Victoria stood at -10.1% p.a., although the number of approvals in Victoria is higher than any other State.

In further signs that lower interest rates are having a positive effect on the housing market, RP-Rismark’s monthly index of capital city house prices rose by 1.9% m/m in June, to be up 3.8% p.a. from a year earlier. It was the strongest monthly rate of increase since March 2010 with house prices rising in every capital city except for Hobart.