Forget about near-term recession fears, the two soft quarterly GDP reports in the second half of 2018 and the approaching Federal election, the Australian economy is showing more signs of improvement than deterioration. Moreover, whether it is the Coalition Government’s 2019 Budget or Labor’s alternative that takes effect, the economy will receive a boost as it is regathering a head of steam in Q3 and Q4 2019.
Even before the Government’s Budget Statement last week there were signs that the economy was starting 2019 in better shape than it left 2018. The weakest part of the economy in the second half of 2018 was home building activity running off the back of collapsing house prices in Melbourne and Sydney in particular. More of the same was foreseen in the first half of 2019 by those fearing that weak housing would drag the economy down in to recession.
Instead of remaining very weak, housing activity started to show tentative signs of bottoming out early in 2019. Off a low base the number of weekend home auctions has started to lift from late January and has continued to lift since and with steadily improving clearance rates now hovering close to 60% in Melbourne and Sydney. It is still taking lower house prices to help clear the market, but price falls are much less than they were in late 2018.
Tighter housing credit conditions that pricked the house price bubble back in mid-2017 are still in place, but there are the first signs that lenders are starting to compete strongly for home loan business. Home mortgage interest rates are being reduced selectively to entice borrowers. The improvement in housing finance conditions is anecdotal at this stage but should be evident in March housing finance data due for release in May.
One peculiar and positive change in housing data has been a lift in home building approvals, up 19.1% m-o-m in February after a 2.3% gain in January. These monthly increases came after sharp declines in home building approvals late in 2018 and although they could turn out to be a false start, it is still fair to say that that they speak more of housing activity finding a bottom rather than continuing to weaken.
Two more strong data reports last week were February international trade showing a lift in the monthly trade surplus to a record $A4.8 billion from the previous record $A4.4 billion set the month before and a much-stronger-than- expected 0.8% m-o-m lift in February retail sales after a 0.1% gain in January.
As far as international trade is concerned high coal and iron ore prices are doing much of the heavy lifting underpinning the value of exports. Rising Australian export prices are also helping to boost national income and company tax payments – the main reason that the Government could forecast with confidence last Tuesday that the Budget will be in surplus by $A7.1 billion (0.4% of GDP) in 2019-20.
More importantly, it looks like high coal and iron ore prices will persist for some time. Activity in Australia’s biggest market for coal and iron ore is showing signs of lifting. Measures taken by the authorities in China earlier in the year to boost growth are starting to bear fruit. The latest manufacturing purchasing manager indices have pushed in to expansionary territory above 50. Purchasing manager reports for the non-manufacturing sector are even stronger. China is likely to show stronger growth readings later in 2019 and the prospects may be even better if the US and China develop a trade deal as seems increasingly likely.
High coal and iron ore prices are likely to continue boosting Australian export values and volumes helping to lift further national income and both nominal and real GDP growth. They also make it highly likely that whichever Government is returned in May it will preside over an even bigger Budget surplus in 2019-20 than was forecast last week.
As far as retail trade is concerned, the big lift in February was a positive surprise and implies a very good chance that household consumption spending is running at much better pace in Q1 than occurred in Q3 and Q4 2018. In turn, there is a strong likelihood that Q1 real GDP will be noticeably stronger as well.
Of course, the much-better-than-expected February retail sales reading needs corroboration from more healthy monthly retail sales readings, but the chances of that occurring seem to be improving. Employment growth has stayed strong so far in 2019. Unemployment is low (extremely low in New South Wales and Victoria). Wages growth is running ahead of inflation. Also, the Budget last Tuesday and Labor’s response provide certainty that all low and middle- income working Australians will receive a cash boost in their 2018-19 tax returns from the doubling of the Low Middle Income Tax Offset rebate from $540 to $1,080 (double for dual income households).
The tide appears to be turning from the gloomy economic news of the second half of 2018 to something brighter in the early months of 2019. Confirmation is needed to prove the economy is improving, especially in housing data. In particular, it is important that the change in March housing finance commitments (due in May) has a positive sign on the front. At this stage, given the increased home buying activity evident in March, a lift in March housing finance commitments looks very likely.