10 April 2015

AUSTRALIAN ECONOMIC DEVELOPMENTS

The RBA held the cash rate at a historical low of 2.25% following its April monthly board meeting this week, although it signalled there could be another interest rate cut in the coming months. Housing loan approvals continue to trend up in February, albeit at a much slower pace. The Australian PCI® for March, also released this week, showed that low interest rates have boosted residential construction activity, but commercial construction has yet to benefit from low interest rates and engineering construction continues to taper as mining investment slows. The Australian PSI® also showed that conditions in the services sector were mixed in March, but overall activity in the sector expanded.

Reserve Bank of Australia keeps the cash rate at 2.25%

The RBA Board left the cash rate at a historical low of 2.25% on Tuesday, surprising some economists who had it expected it to lower the cash rate to 2.00%. In the statement accompanying the decision, the RBA signalled there could be another interest rate cut in the coming months given the outlook for continued below-trend economic growth, weak business capital expenditure and a rising unemployment rate. Indicator business borrowing rates are at their lowest level since the early 1990s, and rates on housing loans have also returned to the lows seen during the financial crisis.

One area that has responded to the low interest rates has been the housing market. The RBA noted that regulators are concerned over the strength of investor activity in Sydney which may explain why the RBA decided to leave the cash rate on hold this week. The RBA noted regulators are implementing measures to rein in lending for investment in Sydney’s housing market.

Strong investor activity in the housing market was reflected in the latest ABS housing finance data, which shows that investment loans now account for 40.2% of all new housing loan commitments. The value of housing loans for investment purposes increased by 0.4% m/m in February to be up 15.3% p.a. In a welcome sign for the RBA, trend growth has slowed in recent months, from annual growth of around 30% through much of 2014.

The number of owner occupied housing commitments increased by 0.2% m/m in February 2015 to be 2.1% p.a. higher (trend). This month’s increase was mainly due to a rise in the number of loans for purchases of established dwellings (mostly by investors) (+0.5% m/m; +3.2% p.a.). In contrast, the number of housing loan commitments used for both the purchase (-1.4% m/m; -4.2% p.a.) and construction (-1.1% m/m; -2.6% p.a.) of new dwellings fell in the month.

Construction edges ahead in March

The seasonally-adjusted Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) increased by 6.2 points to 50.1 points in March. This indicated the slightest of expansions across the construction industry following four months of contracting conditions.

The improvement in March was driven by a solid increase in house building activity which expanded after three months of contraction, and at a rate that was the strongest in five months spurred by low interest rates. Apartment building activity continued to strengthen, with growth picking-up to its highest pace in four months.

In contrast, mining-related engineering construction remained in negative territory declining at a steeper rate in the month. Commercial construction again declined, although its rate of contraction moderated following a marked weakening in February. The operating environment remains tough for many businesses with impediments such a lack of public sector building works, tough competition for the available work and diminishing mining related construction cited as the main constraints on activity.