Last week the Reserve Bank of Australia (RBA) left the cash rate at a record low of 1.50% for the 21st consecutive meeting. In the accompanying statement, RBA Governor Lowe noted the direction of international trade policy in the United States remains a source of uncertainty to the global outlook. Domestically, the main source of uncertainty is the outlook for household consumption which is being constrained by high household debt and slow income growth. However, improving non-mining business investment and strong a pipeline of public infrastructure projects are supporting local activity and jobs growth. Looking ahead, the RBA expects inflation and wages to accelerate gradually from here, as spare capacity in the labour market is absorbed (that is, as unemployment and underemployment fall). Wages appear to be accelerating from 2017’s trough with the latest Trends in Federal Enterprise Bargaining Report indicating the average annualised wage increase was 2.7%p.a.for approved private sector enterprise bargaining agreements in the March quarter of 2018.
Ai Group’s monthly business surveys continue to suggest relatively robust business conditions across most (but not all) industries.The Australian PMI fell slightly to 57.4points in June, indicating a slower –but still buoyant -rate of expansion, while the Australian PSI®rose to a record high of 63.0 in June, extending its run of positive conditions to a 16th month.The Ai-Group/HIA Australian PCI fell by 3.4 points to 50.6 in June, signalling stable conditions in the national construction industry during the month. Results above 50 points indicate expansion, with the distance from 50 points indicating the strength of the increase.
Monthly international trade, building approvals and retail sales data was released by the ABS this week. In May,Australia’s exports grew faster than imports, lifting the trade surplus to almost a billion dollars while the number of building approvals fell in May but were higher over the year (-3.2% m/m and +3.1% p.a., trend data). The nominal value of retail sales increased in May, as delayed winter purchases from April were made.
Manufacturing expansion continues despite energy price pressures The Australian Industry Group Australian Performance of Manufacturing Index(Australian PMI)ended the financial year on a high note, down just 0.1 point to 57.4 to record a 21st month of continuous expansion.
Seven of the eight sub-sectors in the Australian PMI expanded in June, with only the textiles, clothing, furniture and other manufacturing sub-sector indicating stable conditions (trend). The strongest performing sector included the large food & beverages, metal products and machinery & equipment sub-sectors even though the drought conditions in some parts of the country are flowing along supply chains into these sub-sectors.
Manufacturers, particularly those in more energy intensive sector, remain concerned about ongoing uncertainty over energy policy and its dampening impact on the investment needed to ease price pressures.This week, AiGroup released a new report that examines the ongoing energy crisis in Australia. Gas and electricity prices improvements since 2017 have been strictly relative and prices are expected to remain far above their historic averages for the foreseeable future.
Infrastructure investment lifts Australian PSI to record high in June The Australian Industry Group Australian Performance of Services Index(Australian PSI) rose 4.0 points to a record high of 63.0 in June, extending its run of positive conditions to a 16th month.The more business-orientated sub-sectors such as property, finance and transport were particularly buoyant reporting healthy demand from customers in manufacturing and infrastructure. In contrast, sectors more reliant on discretionary household spending -such as retail trade and hospitality –reported more subdued conditions.
Clothing and department store retail sales rebound in May
The ABS estimates that the nominal value of retail sales increased by 0.4% m/m in May, following a 0.5% m/m rise in April(seasonally adjusted). The increase in sales in May was led by department stores (+3.9%m/m) and clothing, footwear and personal accessories (+2.2% m/m), after both industries experienced falling sales in April. It appears that some customers delayed purchasing winter clothing until May after unusually warmer weather in April. Across the states, retail sales growth was led by Tasmania (+1.5% m/m), followed by NSW (+0.5% m/m) and Queensland (+0.4% m/m). Western Australia (-0.5% m/m)was the only state to experience a fall in retail sales in May.
Over the year retail sales are still below the long-run average, growing at just 2.5%p.a.Retail sales have grown slower in the past 10 years (June 2008 to May 2018) than the previous decade (June 1998 to May 2008). Since May 2008 retail sales growth has averaged 3.7% p.a. compared to6.2% p.a. the previous decade (see Chart 2).
Although online sales still account for a relatively low level of retail sales, their share of total sales is increasing.Total online sales were up by 49.0% p.a. and accounted for 5.6% of total retail trade in May, up from 3.4% one year earlier. These estimates are disaggregated into pure-play and multi-channel retailers.Pure-play retailers trade with customers solely via an online store (i.e. have no physical store) and multi-channel retailers combine an online store with a physical store or another non-traditional method (for example catalogues, mail order and telephone-order). Most online sales are with retailers that have a physical store with multi-channel retailers accounting for 62% of total online sales in May and 3.5% of total retail sales while pure-play retailers accounted for 38% of all online sales and just 2.1% of total retail sales(Chart 3).
Construction expansion slowing The Ai Group-HIA Australian PCI registered 50.6 points in June, a decline of 3.4 points from May. This signalled stable or marginal growth in the national construction industry in June.Despite improved growth in commercial construction activity, overall levels of activity in June were adversely affected by a softening of growth in engineering and house building activity, and the continued contraction in apartment building work.
The near-term outlook is still positive but there appears to be a divergence in conditions across sectors within the construction industry(see Chart 4). Improving non-mining business investment and public-sector investment in infrastructure are driving demand in commercial construction and engineering construction, but apartment construction activity is slowing from recent peaks.House building respondents to the Australian PCI cited support from a solid backlog of work, although there were reports of a softening in new orders, weaker new house sales and a more cautious approach by prospective buyers. Apartment builders again pointed to the constraining influences on activity from a reduction in investor activity and project completions.
ABS building approvals data released this week for the month of May suggest that residential approvals could be past their peak.Consistent with recent results in the Australian PCI,building approvalsfor private sector dwellings excluding houses (e.g. apartments)have been falling from record high levels reached in 2017, while approvals for new houses have remained elevated. On a trend basis,the number of approvals for private sector houses fell by 0.5% to 10,065in May, while the number of approvals for private sector dwellings excluding houses (e.g. apartments) fell 2.6% m/m to 7,878. Over the year,private sector housing approvals are up 4.3% p.a. while apartment approvals are down 3.4%p.a.Approvals for the construction of new houses has held broadly stable around at 10,000 per month for most of the past year.
Weak housing finance results and the ongoing tightening of credit availability are likely to see approvals continue to ease from here.The value of new housing finance approvals reached a record high in November 2017 but has been trending downwards since then, falling by0.8% m/m in April 2018(trend). Housing finance is a reasonably reliable ‘leading indicator’ of residential building approvals (see Chart 5) and residential building activity, so this downward trend in finance approvals signals that demand for new residences is easing,albeit from high levels.
Australian imports and exports rise in May Australia’s monthly trade balance jumped to$827 million in May after April’s trade surplus of $977 million was downwardly-revised by more than half a billion dollars to $472 million(Chart 6). Both exports and imports rose strongly but the value of exports(+4.0% m/m)grew faster than imports(+3.0% m/m)during the month. Over the year to May 2018, the value of all exports rose by 8.1% p.a. while the value of all imports rose by 12.6% p.a.indicating a continuation of vibrant two-way trade.
On the imports side, the monthly increase was largely due to higher oil prices.Capital goods, which are mainly used for business investment purposes, increased 10.5% in May 2018 compared to one year earlier. This included especially strong increases for telecommunications and civil aircraft and confidential items. The value of consumer goods imports rose by 8.1% in May2018 compared to one year earlier,with an especially strong increase in food and beverages (+18.6% p.a.) and leisure items such as toys, books (+14.4% p.a.). The value of services imports (mainly for transport and travel services) rose by 7.2% p.a.
On the exports side, the value of resources exports increased by 6.5%m/min May driven by a solid lift in the value of Australia’s three main commodity exports, iron ore, coal and LNG to be14.7% higher than one year earlier. Services exports increased by 1.1% p.a. while exports for manufactured goods fell by 3.3%p.a.
