For a more comprehensive round up of the week, listen to Stephen’s full report here.
Soft Australian economic readings have predominated over the past month or two relating mostly to the months of May and June. Q2 GDP will be released early in September and, not surprisingly, it is also shaping up as a soft affair with overall growth no better than about 0.4% quarter-on-quarter (q-o-q) compared with 1.1% q-o-q in Q1 2014. Beyond the soft Q2 GDP reading in immediate prospect, there is a promise in the latest business and consumer sentiment surveys, as well as in the persistent lift in housing activity, of better growth in Q3.
Home building activity is starting to become a mainstay of growth in 2014 and is likely to remain strong through 2015, too assisted by the current very long phase of low home loan interest rates. Monthly home building approvals have been volatile over recent months, up 10.3% in the month of May before falling 5.0% in June, but the annual growth in approvals was still very impressive in June; up 16.0% year-on-year (y-o-y). Private sector home building approvals on free-standing single home units were up 13.1% y-o-y, while approvals for private home units were up 23.2% y-o-y. The persistent strength of home building approvals since mid-2013 heralds strong growth in home building work in progress for many months to come.
Importantly, there are increasing signs that robust home building approvals still have some way to go. Home buying activity remains very strong, sustaining upward pressure on house prices. Q2 house prices, according to the Australian Bureau of Statistics, increased in the eight Australian State and Territory capital cities by 1.8% q-o-q, or 10.1% y-o-y. Housing finance commitments for owner-occupiers edged up a further 0.2% in June, but were stronger for loan commitments to build a new home, up 1.1%, or to purchase a newly constructed home, up 4.6%.
The rise in housing activity has been tangible for some time and has started, and will continue, to contribute to GDP growth. Other parts of the economy, notably household consumption expenditure and business investment spending – outside of declining mining investment spending – appear to have been soft in Q2, however survey results suggest an improvement in sentiment for better times ahead.
The NAB monthly business survey results were particularly encouraging in July with forward-looking business confidence improving to +11 (a strong reading by historic standards for this survey) from +8 in June, and the current conditions reading improving sharply to +8 from +2. The NAB business survey results coincide with profit results from June year-end reporting Australian companies which so far have mostly beaten analysts’ expectations by a comfortable margin.
From the NAB business survey results, as well as the batch of mostly strong company profit reports, it is reasonable to expect that companies will be favourably disposed to providing more jobs and also to investing more. As far as investing more is concerned, the latest June report of total lending finance commitments made interesting reading. Lending finance commitments showed their strongest monthly increase in the past 5 years, lifting by 7.7% in the month, but with commercial lending commitments up 12.1% and leading the charge. Later this month, Q2 private capital expenditure data (including expectations of spending through to June 2015) will be released and may confirm that there has been an improvement in business investment spending intentions outside the mining sector.
Looking at prospects for household consumption expenditure, consumer sentiment was dealt a heavy blow when the Federal Budget was released in early May. Since then sentiment has improved, according to the monthly Westpac-Melbourne Institute consumer sentiment survey, but barely recovering the sharp fall in May. The latest August survey showed a 3.8% improvement, after gains of 1.9% in July and 0.2% in June. Whether the improvement can be sustained is a moot point given recent news of the unemployment rate lifting to a 12-year high of 6.4% in July and annual growth in wages languishing at a very low 2.6% y-o-y in Q2 and the third consecutive quarter sitting at this low point.
The best that can be said with any degree of certainty about the current Australian economic position and the immediate outlook is that Q2 took a softer turn relative to Q1, but there is a promise of better growth ahead. The RBA will need more than just a promise of better growth before it becomes more relaxed that the economy is starting to improve again. Another confirmation, if any was needed, that the RBA will be sitting on the fence with the cash rate at 2.50% for a long period ahead.