AUSTRALIAN ECONOMIC DEVELOPMENTS
This week the Reserve Bank of Australia (RBA) left the cash rate at a record low of 1.50%, where it has been since August 2016. In the accompanying statement, RBA Governor Lowe noted that the global economic expansion is continuing but the direction of international trade policy in the United States is creating significant risks to global growth and especially growth in trade. Inside Australia, GDP growth is tracking around its trend rate, supported by Government spending and investment and better non-mining business investment. The RBA remains concerned about household consumption, which is being constrained by high levels of household debt and slow income growth, despite an improving labour market. Looking ahead, the RBA expects inflation and wages to accelerate gradually from here, as unemployment and underemployment rates fall.
This broadly positive outlook for Australia was confirmed by Ai Group’s monthly business surveys, which continued to indicate positive business conditions across most (but not all) industries in September (chart 1). The Australian PMI rose to 59.0points in September, its fastest pace since March and signalling two years of solid recovery across Australia’s manufacturing sectors. The Australian PSI rose a touch to 52.5 points, with stronger activity in business-to-business services involved in infrastructure projects and weaker activity in the more consumer-oriented services sub-sectors. The Ai-Group/HIA Australian PCI fell to 49.3 points in September, signalling broadly stable conditions after an extended period of very strong construction industry activity. For all three of these Ai Group monthly business surveys, 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 for the month of August were all released by the ABS this week. In August, Australia’s exports grew faster than imports, lifting the trade surplus to almost $1.6billion.The number of dwelling approvals fell again in August,down from recentpeaks(-1.9% m/m and -9.1% p.a., trend data). Consumer spending might be (tentatively) recovering, with the nominal value of retail sales increasing in August, including at department stores and clothing retailers, which have suffered a prolonged period of weak sales.
Internationally, the International Monetary Fund (IMF)released a new analysis of global recovery from the GFC, as part of its half-yearly World Economic Outlook (the full outlook will be released next week). The IMF says the GFC reduced long-termpotential global growth by reducing fertility rates, migration, trade and income equality. Specific polices have affected outcomes in individual countries. The IMF says countries such as Australia that were in “better fiscal shape, with better regulated and supervised banks, and flexible exchange rates generally suffered less damage.”
Construction expansion is slowing
National building approvals for the month of August suggest the residential construction boom is probably past its peak, following a record high in Q12018 of 225,000dwellings under construction across Australia. Consistent with recent results in the Australian PCI,building approvals for private sector dwellings excluding houses (e.g. apartments) have been falling from record high levels since2017. On a trend basis, the number of approvals for private sector dwellings excluding houses (e.g. apartments) fell 2.7% m/m to 7,615, while the number of approvals for private sector houses fell by 1.2%m/m to 9,655in August. Over the year, private sector housing approvals are now down by 3.4% p.a. while apartment approvals are down 15.1% p.a.(see chart 2).
Looking ahead, fewer building approvals suggest dwelling construction is past its peak, but the level of dwelling construction work is expected to remain high for some time, supported by relatively high (albeit lower) building approvals and strong population growth.Building approvals typically ‘lead’ building activity by 6 to 12 months, so these recent trends suggest that residential construction activity will remain at a relatively high level into early 2019.The Housing Industry Association (HIA) are forecasting a 10.6% decline in home building in 2019, but this would still leave new home commencements at near-historically high levels of 193,600 homes to be built.
In value terms, approvals of non-residential buildings fell a further 2.3% m/m to $3.3 billion in August (trend). The value of non-residential building approvals is coming off a record peak in 2017 and has fallen for the last thirteen months.Fewer non-residential building approvals suggests slower growth in actual non-residential building. This will take time to feed through, since the lag between approval and construction for non-residential is longer than for residential building.
On an annualised basis, the value of non-residential approvals is currently sitting at $45.9 billion, consisting of $16.4 billion for commercial buildings (including offices, transport, retail and wholesale buildings), $6.6 billion for industrial buildings (including factories, warehouses) and $22.9 billion for other non-residential buildings (including education, health, entertainment, and accommodation buildings). In value terms, approvals for commercial buildings has pulled back in 2018 (chart 3). This is consistent with results for the commercial construction in the Australia PCI, which have indicated the value of approvals for other non-residential building is starting to ease while the value of approvals for industrial buildings remains robust.
Across the states, the value of non-residential approvals is down over the past year across the five largest states (trend). However, the value of non-residential approvals has rebounded in NSW in recent months and rose 3.3% m/m in August, while the decline has slowed in Victoria. The biggest decline in August was in Western Australia, with the value of non-residential approvals falling 14.2% m/m and it is now almost half of what is was this time last year (chart 4).
Australian imports and exports rise in August
Australia’s monthly trade balance stayed in surplus in August, rising slightly from +$1.551 billion in July to +$1.604 billion in August(chart 5). Both exports and imports rose strongly but the value of exports (+0.5% m/m) grew faster than the value of imports (+0.4% m/m) during the month. Over the year to August 2018, the value of all exports rose by 15.3% p.a. while the value of all imports rose by 12.0% p.a. indicating continuing growth in a vibrant two-way trade.
On the imports side, the monthly increase was largely due to a 169% m/m jump in capital imports for “civil aircraft and confidentialised items ”(most likely the purchase of a commercial airplane or similar). This drove imports of capital goods, which are mainly used for business investment purposes, 9% m/m higher in August 2018. The value of consumer goods imports rose by 0.4% in August 2018. This slight rise was drivenby higher imports (by value) of non-industrial transport equipment (i.e. cars) and food & beverages, partially offset by falling imports (by value) of household electrical items and toys. The value of services imports (mainly for transport and travel services) rose by 1.0% m/m while imports of intermediate goods fell by 2.3% m/m in August.
On the exports side, the value of resources exports fell by 0.6% m/m in August to $20.6 billion. This fall includedlower metal ores and minerals, metals and coal exports but was partially offset by a large increase (+12.7% m/m) in the export of non-monetary gold. Services exports increased by 0.6% p.a. driven by rising travel exports while exports for manufactured goods rebounded in August,rising by 3.3% m/m after falling 1.6% in July.
Australian businesses optimistic internationally, despite risk of a trade war
The annual Australian International Business Survey(conducted by Austrade and EFIC)found that the outlook for Australian businesses in international marketsis very positive, with 66% of respondents expecting the next two years to be better than the last two years and only 5% expecting the next two years to be worse than the last two years.Only 2% cited the US instability as a reason to target different markets, while 4% cited more broadly global factors such as Brexit and the US-China trade war.The most common reasons for changing target markets were to expand into new markets and because of increased interest in the products or services offered.
With regard to digital technologies, this year’s survey reveals that many Australian businesses that operate internationally are lagging behind in their use of online sales channels to reach overseas customers, with only a third planning to increase their use of online sales and mobile and digital technologies.Interestingly, among respondents who are engaged in other international activities beyond trade and investment, 70% of respondents deemed IP-related activities as essential or very important to generating overseas revenue.
The United States remains the top market that Australian businesses are considering in the next two years, with 20% ranking it as a priority,closely followed by China (19%), the United Kingdom (18%) and Indonesia (15%). This supports other evidence that interactions with the United States market are more important to Australian businesses than the headline ABS trade statistics might suggest. Research by the Department of Industry, Innovation and Science shows that although North America (United States, Canada and Mexico) accounted for only 4.3% of Australia’s gross direct exports in 2014, 9.0% of Australia’s value-added exports are eventually consumed there (see table 1). This implies that demand from North America is 1.69 times more important to the Australian economy than conventional trade statistics suggest. It indicates tha tthe North American market gets more Australian input than from direct exports alone, with additional ‘value-added exports’ making their way to America via increasingly complex international supply chains.A similar pattern is observed for ‘value-added exports’ to the EU and to a lesser extent, the UK.
