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December economic roundup
Our final economic report for 2013 (the next one will be on Monday 6th January 2014) reviews the economic information released in December and the implications for 2014. Australian economic releases showed soft economic growth in Q3 and a mixed bag of October and November economic releases. Comments from the official family (RBA and Treasury) during the month indicate signs of improvement in interest rate sensitive housing and retail spending, but little carry through to non-mining business investment spending and not enough strength in the interest rate sensitive sectors yet to counter the approaching sharp fall in mining investment. Official forecasts point to below long-term average economic growth persisting through 2014.
Overseas, the two biggest economies, the US and China, both showed further signs of improving growth, especially the US. Growth and employment in the US have improved to the point where the Federal Reserve (Fed) felt able to start reducing its monthly purchases of bonds and mortgage paper. Fed Governor, Bernanke, reiterated that monetary policy is not being tightened. That will not occur until the first official interest rate increase and is still a long way in the future, contingent mostly upon the US unemployment rate falling below 6.5% and then staying below for many months. Financial markets appear to have accepted the Fed’s view of the difference between less accommodating policy and tighter policy with bond yields rising little since the Fed announcement, but equity markets rising.
Going back in a little more detail on the Australian economic events of the past month, releases at the beginning of the month showed October home building approvals down by 1.8% (market consensus -5.0%) and October retail sales up by 0.5% (market consensus +0.4%). Both readings were stronger than expected.
In the case of home building approvals, the small fall came after an upwardly revised out-sized increase of 16.9% in September and compared with October 2012, home building approvals are up by 23.1% – private sector approvals to build free-standing new homes up 9.6% y-o-y and private sector approvals to build home units/ townhouses up 47.7% y-o-y. The rise in home building approvals points to a strong improvement in home building activity in 2014. Also, there are no signs of any early peak in home building activity. Housing finance commitments have been rising strongly throughout 2013 and the latest monthly reading for October showed owner-occupier housing finance commitments up another 1.0% marking nine monthly increases in ten months. Investor housing finance commitments continue to rise even more strongly, up by 5% in October and up 25% y-o-y.
Retail sales have been rising since mid-2013, but the two strongest readings are the latest for September, +0.9%, and October +0.5%. Consumer sentiment, as measured by the Westpac- Melbourne Institute survey has been very strong, until the latest December reading showing a 4.8% fall to 105.1 (although this reading is still more than 5% above the long-term average for the survey). Anecdotal evidence, including the liaison work of the RBA, indicate that retailers are enjoying their best pre-Christmas retail spending season in more than 5 years. Most likely the November and December retail sales readings will both show quite strong improvement.
Q3 GDP was also released in early December and was a little disappointing, showing quarterly growth of 0.6% (market consensus 0.7%) and annual growth of 2.3% y-o-y, well below long-term average growth around 3.1%. Real household consumption, up only 0.4% q-o-q and flat residential spending were both disappointing, but are likely to improve in Q4 and in 2014. Exports have started to contribute to growth, lifting on capacity enhanced by recently completed mining investment projects. This “phase 2” of the resources investment boom – stronger production and exports – is likely to improve further in 2014 and much further in 2015 as some of the big LNG projects are completed. However, there are no really big new resource projects in the commissioning pipeline and this will show in much reduced resource project work in progress from mid-2014, the start of the so-called resource investment cliff concerning the RBA and Treasury.
Soft past GDP growth is showing in comparatively weak employment growth and a slowly rising unemployment rate. Employment actually rose more strongly than expected in November, by 21,000 (market consensus +10,000), but that was insufficiently strong to prevent a minor drift up in the unemployment rate from 5.74% to 5.76% which after rounding was a lift from 5.7% to 5.8%. The announcement by General Motors that Holden would stop manufacturing cars in Australia in 2017 highlighted the longstanding drift down in manufacturing employment in Australia. However, the rise in employment over time in other sectors such as retail and wholesale trade; transport and communication; education, health, finance and services more generally receives far less attention. Employment growth, even in these faster growing sectors, is likely to remain comparatively slow in the near-term, but should pick up pace from mid-2014.
This snapshot of Australian economic readings released in December shows an economy that has been growing below trend with rising unemployment. However, the most recent indicators of housing activity, retail sales and exports are all improving. Importantly, there are signs of improvement in global economic growth too. In our view recent official economic forecasts for 2014 – GDP growth of 2.5% with an unemployment rate drifting up to 6.25% – look too pessimistic. Our GDP forecast for 2014 is 2.9% and if pressed we see the risk skewed more to the upside of this forecast than the downside.
Even if our GDP forecast is more accurate than that of the official family, the carry to higher government tax revenues and lower welfare payments is not a prompt affair. The recently released upward revisions to the Federal Governments budget deficit forecasts (to $47 billion for 2013-14 compared with a $31 billion forecast before the September election) would not alter on our GDP forecast although the deficits for the years beyond would be a little lower. Our GDP forecast, however, adds to reasons why we see the next cash rate move by the RBA being a hike, probably in Q3 2014.