Originally published by AMP Capital
Australian data today was mixed.
Home prices decline
- Average capital city home prices fell 1.1% in May according to CoreLogic and rose 8.3% over the last 12 months.
- The falls were dominated by units which lost 2.6% month on month compared to a fall in average house prices of -0.9%.
- Home prices fell in 1.3% in Sydney and 1.7% in Melbourne but all cities excepting Adelaide and Brisbane fell.
The extent of the decline in May is likely exaggerated by weak seasonality in May: home values have fallen in 4 of the last 5 Mays with an average May decline of -0.9%. There is probably also a degree of statistical noise going on here after the unbelievably strong 5% and 4.2% gains seen in the March quarter in Sydney and Melbourne.
But while it’s dangerous, given the volatility in monthly data and seasonal influences, to read too much into one month’s numbers it looks like the combination of surging unit supply, bank rate hikes, tightening lending standards, reduced property investor deductions, ever tighter restrictions around foreign buyers and all the talk about a bubble bursting are driving a down turn in the Sydney and Melbourne property cycles. Our view remains that average home prices are on track for a 5 to 10% decline concentrated in Sydney and Melbourne and that unit prices in parts of Sydney and Melbourne will fall by 15-20%. In the absence of much higher interest rates, much higher unemployment and a generalised oversupply a property crash (say a 20% plus fall in average home prices is unlikely). Of course its dangerous to generalise across Australia – Perth property prices are probably getting close to the bottom and Brisbane and Adelaide prices are likely to continue meandering along at around 3% year on year.
Challenging business investment outlook
The March quarter capital expenditure (capex) survey was on the whole a little disappointing, particularly in terms of the outlook. But there are a few moving parts in the data that need to be considered:
- Actual capex in the March quarter rose by 0.3% (a little below expectations for a 0.5% rise).
- Machinery & equipment capital spending was down by 0.1% and this is the component that is directly used in GDP estimates (March quarter GDP data is released next week).
- Buildings and other structures capex was better over the quarter – up by 0.7% but is still lower than a year ago because mining capex continues to fall.
- Surveyed firms also gave an estimate around plans for capex spending in 2017-18. Compared to three months ago, firms spending plans are relatively unchanged and still point to a poor outlook for business investment. Mining capex is still expected to decline by 30% or next financial year and non-mining capex looks like it will rise by a small 0.6% this financial year (2016-17) and fall marginally by 0.8% next financial year. Manufacturing capex plans look disastrous in FY18.
- We would caution that there have only been two estimates for FY18 capex spending which normally tend to be revised up as the financial year actually gets underway and firms have a better outlook around spending plans. Nevertheless ,the ongoing weakness in non-mining investment at a time of continued weakness in the mining sector is a concern for the growth outlook
- The other point to note is that mining investment has declined significantly as a share of GDP so the drag on growth from ongoing declines in it is starting to abate. As a share of GDP it should be back to normal next financial year so we should be near the bottom.
Retail sales rebound
Australian retail sales rebounded unexpectedly by 1% in April, much stronger than consensus (0.3%). This is the best improvement since Sep 14, edging up the annual pace from 2.2% to a relatively modest 3.1%. The rebound follows weak sales over the prior 2 months which had seen sales slow from 3.0% to 2.2% (see chart below). There may be some seasonal impact from Easter (which was over April) and better weather in Queensland which supported retail data for the month.
- The bounce back was broad-based, with all major sectors seeing modest to strong growth.
- By sector, department stores bounced up strongly (2.5% m/m), with the y/y pace up to a flat 0.1% (from -2.5%), as did food (4.3% y/y from 2.7%) and ‘dining out’ saw ongoing modest gains (1.1% m/m and 5% y/y).
- By state, QLD and VIC recovered strongly (4.1% & 4.2% y/y from 1.0% & 3.0% y/y respectively) while the recent trend of slowing for NSW continues (2.6% from 3.1%).
- Retail sales have been volatile of late, and despite the surprising growth in April, lacklustre consumer confidence, soft wages growth, constrained pricing power and slowing dwelling prices are still pointing to limited retail spending growth.
Manufacturing PMI falls but still strong
The AIG’s manufacturing conditions PMI fell 4.4 points in May to 54.8. However, this series is very volatile and the readings around 58-59 in the previous three months were too good to be true. That said at 54.8 it’s still suggesting solid growth in manufacturing with both new orders and employment remaining reasonable.
Implications
The March quarter investment data did nothing to alter our expectation for March quarter GDP growth of just 0.1% quarter on quarter or 1.5% year on year. But there are still plenty of partial indicators to be released next week that will firm up our estimate. The risk is that negative disruptions to trade from cyclone Debbie will mean another weak (or negative) June quarter GDP result.
The forward-looking capex data indicates that the outlook for business investment is still challenging in Australia and along with weak consumer spending and slowing housing construction will keep GDP growth subdued and below trend. The slowdown in house price growth will be welcomed by the RBA but we think another rate cut is unlikely right now, because the headline unemployment rate is low-ish, employment growth is good and business surveys still look strong. However, while our base case is for the RBA to remain on hold this year, the combination of weaker growth and inflation than it expects and the slowing now evident in the Sydney and Melbourne property markets means that the probability of another rate hike is steadily rising. The money market’s implied probability of a 20% chance of a rate cut by year end is still too low – it should probably be around 45%.