The indicators of Australian economic activity are diverging more distinctly of late between sharply improving forward looking indicators being business and consumer sentiment, housing finance commitments, the shape of the yield curve, share market performance and still weak backward looking indicators being employment and unemployment, wages growth and inflation. While there is a special factor at play, the federal election outcome, in the most recent big improvements in business and consumer confidence, other signs are more enduring that economic activity will be stronger in the future than it is currently or has been in the past few quarters. On balance, it is getting harder to escape the conclusion that economic activity is about to take a turn for the better, notwithstanding the much-discussed pull-back in mining investment spending, which may turn out to be an overstated downside risk to Australian growth given the improvement in leading indicators of economic activity in Australia’s biggest trading partner, China.
Taking first the evidence of improvement in Australian leading indicators, some have been lifting for some time. The number of housing finance commitments for owner occupiers has improved each month so far in 2013 and the latest reading for July showed a 2.4% increase in the month to be up 15.9% on July 2012. Taking a less optimistic view of the data rising housing finance commitments are yet to show in more loans to build houses (down 2.1% in July and up only 1.1% since July 2012) and are not yet showing in bank credit growth (up only 0.4% in July and 3.2% from July 2012). Even this less optimistic view may not be sustainable for much longer. While owner-occupier home loan commitments to build a home are still soft, the same cannot be said for loan commitments to buy a newly-built home which were up 5.9% in July and up by 52.1% from July 2012. On those figures home builders are likely to be selling down their stock of new homes rapidly, itself a powerful spur for new home building activity.
Similarly, the period of very slow bank credit growth may be drawing to a close. While new housing finance commitments and to a lesser extent new commercial loan commitments have been picking up pace over recent months, the impact on the stock of credit outstanding has been muted by the activity of existing home mortgage borrowers getting ahead of scheduled loan reduction by keeping regular mortgage payments unchanged as interest rates have come down. However, the rapid growth in new loan commitments is just starting to get the upper hand and it is noticeable taking the most recent three months credit readings that annualised credit growth is 4.4% in the three months to July, up from 2.8% in the three months to April and 2.4% in the three months to January. Apart from accelerating growth in home loan commitments, another reason why the acceleration in credit growth is likely to become more pronounced over coming months is the likely absence of interest rate cuts, as opposed to rate cuts in December 2012, May 2013 and August 2013 in the earlier periods considered.
Consumer and business confidence most likely owe much of their latest lift to anticipation and fulfilment of expectation that a coalition government would be elected with a majority in the lower house. Nevertheless, the latest 4.7% lift in the Westpac-Melbourne Institute consumer sentiment survey came after largely unexpected increases in the previous two months that cumulatively have taken the index reading to 110.6, well above its long-run 100 average reading and in territory that in the past has heralded a loosening of household purse strings. The time appears ripe for a change in household spending behaviour. Extreme caution has prevailed for the past five years with the household savings ratio locked above 10% of household disposable income. The reasons for this extreme caution are fading quickly. Household wealth under pressure in the wake of the global financial crisis is improving. The Australian Bureau of Statistics shows house prices across the eight state and territory capital cities up by 2.4% in Q2 2013 and up by 5.1% y-o-y. There is ample evidence that house prices have accelerated further in Q3. The local share market (ASX 200) is up more than 18% since the end of 2012 and is up 27% over the past 12 months.
Backward looking economic readings still look bleak. Employment has fallen two months in a row and the unemployment rate is drifting up. Measured annual GDP growth was running below trend 3% in Q1 and Q2 2013 mostly because of the start of a significant pullback in mining investment spending. Annual wages growth is hovering around 3.0% very low by historical standards, although it should be noted above annual inflation (2.4%). Looking ahead, housing activity and household consumption expenditure both look set for improvement. As for the rundown in mining investment spending the uptick in China’s economic readings place a question mark on whether that will be as severe as widely feared. Among the recent batch of data from China perhaps the most impressive and important for Australia was the lift in August industrial production, up 10.4% y-o-y against market expectations of a 9.9% increase and up from 9.7% in July which when published was also a positive surprise. More importantly, steel production and power generation have been among the strongest contributors to the rise in China’s industrial production, almost entirely unexpected good news for Australia’s iron ore and coal producers.
On balance, recent economic news at home and overseas is pointing to an acceleration in Australian growth and one that is still not widely expected. It helps to look forwards rather than backwards.