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Who's right on the Oz economy? Doomsday merchants or optimists?

Peter Switzer
Monday, July 16, 2018

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The rising strength of the Australian economy still seems to be doubted by many in the media and in the economics fraternity but not by the UK recruitment firm Hays, whose share price rose over 8% on Friday on the back of double-digit growth, thanks to its businesses in Germany and Australia! This comes when some local banks are starting to raise interest rates because they need to borrow from overseas, where rates are on the rise.

Certainly, our job creation story has been the best economic news headline coming out of the past two years but the readings from NAB's business conditions indicator have also been record-breaking.

And while business confidence has also shown signs of strong positivity, the latest reading saw a significant pull back. On the other hand, the Westpac consumer sentiment number has continued to trend higher, with the latest result for July showing that confidence is at a two-year high.

Making some experts on the economy glum to the point where they think the Reserve Bank won’t raise interest rates until 2020, is the lack of inflation and wage rises, as well as a negative outlook for house prices that they think will hurt the confidence of consumers as they see their houses become less valuable.

There’s also the concern that banks will raise interest rates again because of overseas funding costs and then mortgage stress could kick in. Yep, the doomsday merchants (or maybe the realists) have things to worry about, but it seldom seems to be an “on the other hand” argument, where the bad parts of the economy are matched against the good parts.

I will try that now.

The good bits:

• The Westpac/Melbourne Institute survey of consumer sentiment index rose by 3.9% to 106.1 in July – the highest level in 4½ years. The index is above its long-term average of 101.4. A reading above 100 denotes optimism.

• The number of dwelling starts rose by 5.2% to 57,112 in the March quarter, driven higher by an 8.8% surge in apartments. Work started on 221,043 new dwellings over the year.

• The number of loans (commitments) by home owners (owner-occupiers) rose by 1.1% in May – the first increase in six months but loans are down by 2.5% on the year, though this isn’t shock, horror news, given the negative housing headlines.

• The average credit card balance rose by $56.40 to $3,251.30 in May, up by 4.1% over the year – the strongest annual growth rate in 7½ years. This shows the consumer is getting more confident to borrow to spend.

• The NAB business conditions index rose from +14.0 points in May to +15.0 points in June. The long-term average is +5.7 points. 

• The Performance of Construction index (PCI) fell from 54 in May to 50.6 in June – the 17th consecutive month of expansion, but the lowest level in 17 months. Readings over 50 signify construction sector expansion. Despite the lower number, the expansion story is a good one.

• Australia's annual exports to China rose from US$100.78 billion in April to US$102.65 billion in May – a new record high.

• The trade surplus rose from a downwardly-revised $472 million (previously $977 million) in April to $827 million in May. It was the 10th surplus in 12 months.

• ANZ job advertisements fell 1.7% in June but these important future indicators have been at 7-year highs!

• The CoreLogic Home Value Index of capital city home prices fell by 0.3% in June, to stand 1.6% lower over the year. The national home price index fell by 0.2% in the month to be down 0.8% over the year. Hobart home prices are up 12.7% over the year. (I know these are down numbers but that’s what the monetary officials wanted but the falls are small and not telling me that a house price disaster is coming).

• Private sector credit (effectively outstanding loans) rose by 0.2% in May after a 0.4% rise in April. It was the slowest monthly growth in 16 months. Credit was up 4.8% over the year – equalling the slowest rate in four years. (This could have been in the bad bits part but it looks like an orderly slowdown, which is what the RBA would’ve hoped for).

• The Australian Industry Group (AiGroup) Performance of Manufacturing Index fell from 57.5 points to 57.4 in June. But the CBA/Markit Manufacturing Purchasing Managers’ Index rose from 53.2 points to 55 in June. Both surveys have readings above 50 points, indicating that the manufacturing sector is expanding.

• In the 12 months to May 2018, the Budget deficit stood at $12.8 billion (less than 0.7% of GDP), up from $12.1 billion in the year to April – the smallest rolling annual deficit for nine years.

• Job vacancies rose by 5.7% to a record 236,000 in the three months to May. Job vacancies are up by 24.1% on a year ago – the strongest annual growth rate in 7½ years. 

• Australia's unemployment rate unexpectedly dropped to 5.4% in May 2018 from 5.6% in the prior month, while markets expected 5.5%.

• Engineering construction work done rose by 2.8% in the March quarter to stand 13.7% higher than a year ago. A month ago, it was estimated that engineering construction was up by 1.5% in the quarter.

• Excluding resources, engineering work yet to be done stands at $44.2 billion, just below record highs. Outstanding road and railway work are both at record highs.

The bad bits

•  In trend terms, lending for alterations and additions (renovations) of homes fell to 17-year lows of $310.8 million in May, down 22.6% from the most recent peak of $401.3 million in September last year. The annual decline of 19.9% was the lowest in 7½ years. 

• NAB’s business confidence index fell from +6.7 points  in May to +5.7 points in June – the lowest level in 20 months. The long-term average is +6.0 points, though this could be a rogue number or affected by talk of trade wars.

• Construction employment fell by 3.3 points to 48.2 points in June – the lowest level and the first contraction in jobs in 17 months. 

• Council approvals to build new homes fell by 3.2% in May – the third fall in four months. But the rolling annual total of approvals rose to a 15-month high, so it’s not all bad!

• In seasonally-adjusted terms, new detached house sales fell by 4.4% in May to stand 12.8% down on the peak in December and stand 14.1% lower than a year ago.

As you can see, the case for optimism still looks pretty strong, though I do worry about what a trade war might do to this pretty picture. Ruling out external threats, I remain bullish on Australia, and especially like this from CommSec’s Craig James: “Consumer views on current economic conditions (for the next year) rose by 5.1% to 116.5 points last week – the second highest level on record.”

Yep, I’ll run with that!

Published: Monday, July 16, 2018


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