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All signs point to growth slump

Tue, 31 May 2011 03:13:04 +0000

The expected contraction of the economy in the March quarter looks likely to be deeper than previously anticipated while the early signs of the subsequent recovery are not encouraging.

The Australian Bureau of Statistics today released March quarter foreign trade and government spending figures, along with April building approvals data, the Reserve Bank of Australia published its estimates of financial aggregates for April, and RP Data released its home price index results for April.

The government spending figures were positive, with total spending including consumption and capital investment rising by 0.8 per cent in the quarter in seasonally adjusted volume (ie inflation-adjusted) terms.

Government spending adds up to about a quarter of gross domestic product (GDP), so that will add about a fifth of a percentage point to GDP growth, to be reported in the national accounts tomorrow.

But that small addition to growth will be swamped by the slump in exports revealed in the trade figures.

Exports were down by 8.7 per cent, while production was further eroded by a 1.3 per cent rise in imports. The implied widening of the gap between spending and production means foreign trade will strip 2.4 percentage points from GDP growth in the quarter, the biggest one-quarter hit to growth from trade in the 52-year history of the national accounts.

In a survey of economists earlier this week, forecasts for the change in GDP in the quarter centred on a fall of 0.4 per cent, but the trade figures are bound to prompt significant downward revisions of this forecast.

The building approvals figures suggest no help from this quarter in dragging the economy out of the flood-induced slump in the March quarter.

The number of residential approvals was down by 1.2 per cent in April, while their value was down by 1.3 per cent.

The big move was in non-residential approvals, though, with a fall of 39 per cent indicating the previous month’s jump of 47 per cent was a temporary surge as the backlog from the flood-related pause early in the March quarter worked through.

Total approvals by value were down by 19 per cent in April to a level 6 per cent lower than the 2010 average.

The RP-Data Rismarck figures showed city housing prices fell by 0.3 per cent in April, 1.2 per cent in the three months to April, seasonally adjusted, and by 1.5 per cent from a year earlier.

The RBA numbers showed total credit provided to the private sector was unchanged in April, with a relatively weak 0.4 per cent rise in housing credit offset by falls in other personal credit (0.4 per cent) and business credit (0.6 per cent).

Overall, the figures suggest the March quarter slump was deeper than expected and give no support to hopes of a rapid recovery.

Smh article excerpts

Home building starts down to lowest levels in 8 years

Wed, 17 Jun 2009 05:14:30 +0000

HOME building fell to its lowest level in eight years in the first three months of 2009, with work starting on just 30,949 properties.

Australian Bureau of Statistics data, released today, shows dwelling commencements were 22.5 per cent lower than a year earlier, posting a 4 per cent decline compared to the December quarter 2008.

The last time so few homes were being built was in June 2001 when the construction sector was recovering out of a slump that followed the introduction of GST a year earlier.

article excerpts news.com.au

Local car market in trouble

Fri, 07 Nov 2008 02:17:51 +0000

NEW-CAR buyers may be in for an early Christmas treat as overburdened dealers rush to clear 2008 stock.

Buyers can expect heavy discounts as the slump in new-car sales takes hold.

There have been softenings in the car market†before but there’s not been the abrupt drop in sales.

A†month or two it’s gone from all-time record levels to a dramatic slump in sales and there is†no indication that†the environment is†going to improve.”

New-car sales were down 10 per cent last month and inventory levels are rising.

The figures show†the new car market is in severe decline, with 79,105 vehicles sold last month, down 10,184 sales or 11.4 per cent on October 2007.

Many brands have been hit hard, among them Mazda, Kia, Hyundai, Mercedes-Benz and Lexus.

Mazda, which has been a sales star in recent years, reported a 24 per cent sales drop last month.
Budget Koreans Hyundai and Kia experienced a 35 per cent and 31 per cent sales plunge.

Lexus sales fell more than 60 per cent last month and Mercedes-Benz sales were off 43 per cent.

Many luxury marques blame the negative impact of the new Luxury Car Tax, which rose 8 per cent to 33 per cent from July 1.

Holden also reported an 11 per cent drop for the month.

Australia’s Reserve bank says rate cut may be needed – SMH 19-8-08

Tue, 19 Aug 2008 05:13:09 +0000

Borrowers take heart: the Reserve Bank of Australia feels your pain.

The central bank, acknowledging a slump in borrowing, lower consumer confidence, and weaker growth prospects, says an early rate reduction may be needed.

“Less restrictive conditions could soon be called for, otherwise the risk of a deeper and more persistent slowing in the economy would increase,” the bank said in the August minutes.

“On these considerations, a case could be made for an early reduction in the cash rate.”

The anticipation comes in the release of the minutes from its August 5 rate meeting, when the central bank kept rates on hold at 7.25% for the fifth consecutive month, even as it signalled to mortgage holders that the “scope” for rate cuts ahead was increasing.

The dollar dipped before the release of the minutes, before returning to trade around 86.7 US cents.

Another sign of the toll exacted by high interest rates became apparent today with a Housing Industry Association report showing the construction of new homes is forecast to fall 6% for the 2008/2009 financial year.

The pace of building is set to slow to about 145,300 from 154,200 homes last year as the RBA’s rate tightening sours the appetite for risk taking by businesses and homebuyers alike.

“Interest rate reductions will, in time, boost confidence and then construction activity, but that’s a 2009-2010 story,” said HIA policy chief Chris Lamont in the report. With the supply of homes unable to jump up to meet increased demand when rates fall, the construction shortfall will make life more difficult for renters, Mr Lamont said.

Home-loan approvals dropped more than expected in June, pinched by the RBA’s and bank’s high interest rates. The number of home loans, seasonally adjusted, dropped 3.7% in June from the previous month, according to the Australian Bureau of Statistics.

A matter of words

The language, echoing the words used at the time of the August rate decision, depicts the economy as slowing rapidly, in part, because of forces outside RBA governor Glenn Stevens’ influence.

Rate changes are the RBA’s tool for influencing the pace of economic activity.

In the past five years, amid the nation’s commodities export boom, the central bank has raised rates to the 12-year high of 7.25% to prevent rising spending from triggering a recession.

Mr Stevens’ efforts of halt excess consumer spending have been helped by a temporary spike in the price of oil, which shot up to $US146 per barrel in early July, and took a big chunk out of consumers’ wallets, although the minutes note oil prices have eased considerable since then.

Commercial banks, such as Westpac and ANZ, have used the higher official interest rates as an opportunity to pad their own lending rates since the beginning of the year. The average mortgage from a major bank now costs 9.6%.

For homeowners, those added costs soak up money that would be spent on other items such as clothes and electronics.

Sales of those items have been flat or weaker in recent months.

In its minutes, the RBA noted consumer spending “had weakened considerably in 2008,” much stronger language than the view it† “was slowing” in its July meeting minutes.

The bank reiterated its concerns about the effect of powerful opposing forces at work in the economy with tight financial conditions coming up against the influx of money coming from the resource sector.

Resource income is set to continue judging from BHP’s projections for the next year.

BHP Billiton posted a record profits of $17.8 billion for the 2008 financial year yesterday and said it expected $28 billion in 2008-2009 underpinned by demand from China.

Cuts…Yes but when?

The RBA’s minutes also reveal the bank’s awareness of consumers’ expectations of a rate cut.

“Market expectations about monetary policy in Australia had changed significantly in the past month, reflecting the accumulating evidence of slower demand in the economy. The market had now fully priced in a cut in the cash rate by October, with a further cut by February.”

Currently, the market sees a 0.25 percentage point rate cut after the RBA’s September 2 meeting as a near certainty and puts the chance of a 0.5 percentage point rate cut in that time at one-in-four, according to Credit Suisse. Within the next year, the index expects the official cash rate to be 7%.

Whether commercial banks, which have piled on 60 basis points of rate increases since the beginning of the year, will lower their interest rates when the RBA does remains to be seen.

The issue has grown into a war of words between the Government, which wants future RBA cuts passed along, and banks, which are slow to give up extra padding to their profit margins.

Economists divided

RBA-watchers took different message away from the minutes.

“It is not clear from the minutes that the RBA is about to cut the cash rate in September,” said Lehman Brothers economist Stephen Roberts in a note to clients.

“Indeed, the minutes seem to imply that something needs to shift in the balance between high inflation and decelerating growth to trigger the first rate cut.”

“Our view remains that the RBA may wait for a clearer indication that inflation pressure has peaked from the third quarter inflation readings in late October before starting to cut the cash rate.”

Mr Stephens added that a September second rate could still happen.

The “nuanced” message in the minutes, contrasted against the clear terms the RBA used at the time of the August rate decision, should caution the market from “getting too far ahead of itself and pricing in more assertive easing into 2009″ said JP Morgans’ Stephen Walters in a note.

“We still forecast further easing by mid-2009, but the dominant risk appears to be that the RBA will move less aggressively than we forecast,” he said.

“Either way, the persistence of elevated inflation means the policy rate still will be on the tight side of neutral when the easing cycle ends.”

Since mortgage borrowers don’t apply for loans at the RBA, the heart of the rate-cut issue remains focused on whether the commercial bank will pass official rate cuts on to consumers.

“It now looks more likely than not that the Aussie banks will pass on the RBA’s first 25bp rate cut in full,” Mr Stephens said.

Commonwealth Bank head Ralph Norris said his bank, which announced a 7% increase of annual profits last week to $4.8 billion for the year, may not pass cuts on to consumers when they come.

No less a voice than Prime Minister Kevin Rudd has weighed in on the subject calling for banks to pass the eventual rate cuts along as the “right and reasonable thing.”

“The political pressure on the banks has stepped up a notch, but the decision to pass on the rate cuts will have more to do with the competitive tension in the home mortgage market than the threat of retribution,” he said.

“Indeed, there is a possibility now that one of the big banks will lower their mortgage rates by more than 25bp after the RBA’s first rate cut, which is sure to prompt a response from the other banks,” Mr Stephens said.

czappone@fairfax.com.au