G’day, forex mates! Another RBA Statement Tuesday is coming up, so its time to have another roundup of Australia’s major economic reports, especially the ones that the RBA is keeping an eye on.
Note: Like my other Economic Snapshots, there are nifty tables at the bottom, so you can skip to those if you’re a forex trader who’s in a hurry. The bullet points provided highlight the underlying details and trends that give the numbers their proper context, however.
- Australia’s Q4 2016 GDP printed a 1.1% quarter-on-quarter expansion, beating forecasts for a 0.7% increase.
- The rebound means that Australia avoided a technical recession after Q3’s disappointing 0.5% contraction.
- The 0.9% increase in household spending (+0.4% previous) was the main driver for the recovery, since it added 0.5% to GDP growth (+0.2% previous).
- Private business investment was also a driver, adding 0.2% to GDP growth (-0.1% previous).
- This marks the first increase in private business investment after nine consecutive quarters of declines.
- Government investment became a major driver again after being the main drag in Q3.
- Government investment increased by 7.7% (-7.8% previous), adding 0.3% to total GDP (-0.4% previous).
- The 34.2% surge in national defence investment, in turn, was the main driver for total government investment.
- Net trade was also a driver, adding 0.2% to total GDP, thanks to the 2.2% increase in exports.
- Trade was a dud back in Q3, since exports and imports cancelled each other out.
- Year-on-year, Australia’s economy grew by 2.4% in Q4.
- Also, Q3’s +1.8% annual growth, which was the slowest year-on-year expansion since 2009, was upgraded to +1.9%.
- The major driver for the faster year-on-year growth was net trade, since it added 1.5% to total GDP growth (+0.7% previous).
- Household spending was also a major driver, adding 1.5% to annual growth (+1.4% previous).
- Meanwhile, private business investment was less of a drag, subtracting only 0.8% from GDP growth (-1.4% previous).
- Australia’s seasonally-adjusted jobless rate held steady at to 5.9% in March.
- This is the worst reading since January 2016.
- But on an upbeat note, the labor force participation rate jumped from 64.6% to 64.8%.
- This is the best reading in eight months.
- Still, the Australian economy wasn’t able to fully absorb the influx of new workers since the number of unemployed people rose slightly from 749K to 753K.
- In terms of job growth, the Australian economy generated a net increase of 60.9K jobs.
- This is largest net increase in jobs since September 2015.
- Not only that, net loss of 6.4K jobs reported during February was upgraded to show a small 2.8K increase.
- This means that Australia’s economy has been generating jobs for six months straight.
- Moreover, the net increase in jobs was due to the net gain of 74.5K full-time jobs, which was partially offset by the loss of 13.6K part-time jobs.
- This is the largest net increase in full-time jobs in almost 20 years.
- Headline CPI rose by 0.5% quarter-on-quarter in Q1 2017, matching Q4 2016’s reading.
- Year-on-year, CPI advanced by 2.1%, accelerating from the previous quarter’s 1.5%.
- This is the best reading in 10 quarters and also marks the third consecutive quarter of improvements for the annual reading.
- Moreover, headline CPI is now within the lower bound of the RBA’s target range.
- For reference, the RBA’s target range for annual headline inflation is 2-3%.
- Meanwhile, the annual core reading rebounded from 1.6%, a low not seen since 1998, to 1.9%.
- This is the best reading in five quarters.
- On a quarter-on-quarter basis, 6 out of the 11 sub-components printed increased while the rest took hits.
- Year-on-year, only 3 of the 11 sub-components got hit.
- Interestingly enough, the biggest driver for quarter-on-quarter CPI was the 0.8% increase from the housing component, which added around 0.2% to CPI.
- And of the housing component, the 2.2% increase in the cost of utilities accounted for 0.11%, the 1.0% rise in the price of new dwellings accounted for about 0.09%, the 0.1% rise in rent added 0.01%, and the rest only had very minimal contribution.
- The soft rise in rent and higher cost of utilities was anticipated by the RBA, but the higher cost of dwellings was not.
Business Conditions & Sentiment
- The National Australia Bank’s (NAB) business confidence index continued to ease further, this time from 7 index points to 6 in March.
- The reading is still above zero and is in-line with the long-run average, so the reading is still somewhat good.
- Also, business sentiment has been positive since September 2013.
- NAB found the slide in sentiment “perplexing” because the reason for the side is not clear, although “global political uncertainty is a likely candidate although longer term domestic uncertainties cannot be ruled out either.”
- Moving on NAB’s business conditions index jumped higher to 14 index points after slumping to 9 index points previously.
- NAB warns that the reading may be overstated, though, since the number of suryey respondents from Queensland, which got ravaged by Cyclone Debbie, “was the lowest since 2011.”
- Having said that, the jump was apparently due to higher sales and profitability in the service, wholesale, and mining sectors.
- Meanwhile, business conditions in the retail trade industry continue to suffer.
- As for NAB’s labour costs index, it showed that wage growth continues to rise at a slower pace (+0.7% vs. +0.8% previous).
- Moving on to the Australian Industry Group’s (AIG) performance of services index (PSI), the reading for March printed a very solid recovery from 49.0 to 51.7.
- This ends two months of worsening readings, which culminated in the first reading below 50.0 in five months.
- The sales sub-index, which took a severe 10.6 point hit in February, made a comeback by jumping 7.0 points to 53.8.
- The 5.8 point jump to 55.0 in the employment sub-index and the 2.5 point jump to 52.3 in new orders also helped.
- Despite the recovery, commentary from AIG was a bit troubling since “suppliers to the house construction and defence sectors experienced stronger demand, with low interest rates and stronger migration having a positive effect on their sales.”
- In most other sectors, however, “respondents reported lower customer demand from households and increased discounting by competitors.”
- Moreover, the wages sub-index fell by 2.5 points to 55.5, which means that wages continue to grow in March, albeit at a slower pace compared to February.
- The services sector staged a recovery in March, but the manufacturing sector took a hit, falling by 1.8 points tp 57.7.
- The reading is still pretty solid, though, and is the second best reading in 13 months to boot.
- Anyhow, almost all sub-indices took hits but were still above the 50.0 neutral level, which is good.
- The production sub-index got hit the hardest, easing by 7.7 points to 57.6.
- Things look a bit promising, though, since new orders rose by 2.0% to 62.6.
- Exports also took a big hit, falling by 5.9 points to 51.1.
- However, domestic demand seems to have compensated for lower export levels since the sales sub-index improved by 2.4 points to 57.7.
- And similar to the service sector, wages in the manufacturing sector continued to grow but at a slower pace, since the wage index fell by 4.8 points to 54.0.
- Moving right along, AIG’s performance of construction index (PCI) also got hit, falling by 1.9 points to 51.2.
- Housing construction activity remained very strong and even slightly improved further by 0.4 to 61.3.
- All other construction activity fell, however, which is why the headline reading fell.
- And according to commentary from AIG, survey respondents “pointed to a range of pressures which were constraining activity, including subdued private sector investment.”
Switching over to the topic of business credit, business loans stagnated in March after two months of declines.
- Year-on-year, business loans only increased by 3.4%.
- This is the weakest year-on-year reading since August 2014, as well as marking the third straight month of weakening readings.
- Business credit has been growing (on an annual basis) since September 2011.
Consumer Spending & Housing Credit
- Retail trade turnover in Australia fell by 0.1% month-on-month between the months of January and February.
- Looking at the details, the weak reading was thanks largely to the 2.5% fall in retail trade turnover in clothing, footwear & personal accessory retailing.
- The 0.4% fall in household goods retailing was also a drag.
- As for the drivers, there was the encouraging 0.8% rise in department store retail trade turnover (-0.5% previous).
- Meanwhile, food retailing printed another 0.3% increase.
- As for other retail store types, they reported stagnant trade turnover.
- Moving on, the year-on-year reading only printed a 2.9% increase.
- This is the weakest annual reading in 42 months.
- In addition, this marks the fourth month of worsening annual readings.
- Regarding personal loans, both the monthly and annual readings were in negative territory again in March.
- On a monthly basis, personal credit fell by 0.3% in March.=
- Year-on-year, personal credit slumped by 1.5%.
- This is the biggest year-on-year contraction since April 2012.
- Moreover, both monthly and annual readings for personal credit have been contracting since January 2016.
- Housing loans to owner-occupiers, meanwhile, continue to grow at a steady pace, printing another 0.5% month-on-month increase.
- Year-on-year, it maintained its 6.2% pace, which is the lowest reading since September 2015.
- As for housing loans to investors, they increased by 0.6% month-on-month in March.
- This is slower compared to February’s +0.7%, but still an increase nonetheless.
- On an annual basis, however, housing loans to investors grew by 7.1%, which is the fastest reading since January 2016.
- Also, housing loans to investors have been steadily picking up the pace after bottoming out at an annual pace of 4.6% back in August 2016.
- This may mean that speculative pressure on the Australian housing market is still picking up, increasing the chance of a housing bubble.
- Trend wise, overall housing credit ticked higher from +6.4% to +6.5%.
- Total housing credit bottomed out at 6.3% back in November 2016 and looks like it has been slowly rising since then.
- Australia seasonally-adjusted trade surplus widened to $3,573 million in February, which is the second biggest surplus on record.
- That’s in Aussie dollars, by the way.
- This marks the fourth month of surpluses.
- The larger surplus was due to exports jumping by 1.5% to $32,405 million and imports dropping by 5.3% to $28,832 million.
- This is great, but the drop in imports was due largely to the 10.05% slump in imported consumption goods, which may be a bad sign for consumer spending.
- But on an upbeat note, imported capital goods increased by 1.3%.
Putting it all together
Australia’s Q4 GDP report was released before the April RBA statement, so nothing much to really say about it.
Looking forward, things currently look mixed for Q1 GDP growth since the trade surplus in February was the second biggest surplus on record. Even better, a look at imports shows that capital goods continue to increase, which means that business investment will likely print another positive reading in Q1.
However, retail sales took a hit in February after a promising start in January. In addition, imports of consumer goods plunged hard in February, which may translate to further weakness in consumer spending in March. In addition, NAB and AIG noted that survey respondents reported lower customer demand from households in March, which is another sign that consumer spending likely took a hit in March.
And as I noted in the breakdown for GDP, Australia avoided a technical recession, thanks in large part to the recovery in household spending.
Moving on to the labor market, the RBA expects the jobless rate to be around 5.75% by June 2017. Unfortunately, the jobless rate is currently a bit off at 5.9%. But on a more upbeat note, the high jobless rate (relative to the RBA’s forecasts) was due to the steady rise in the participation rate. But on a more downbeat note, wage growth continues to grow at a slowing pace, which is probably why retail sales took a hit in February and may have taken a hit in March.
As for inflation, the annual reading of +2.1% in Q1 2017 happens to be the best reading in 10 quarters. Moreover, CPI is already within the lower bound of the RBA’s 2-3% target range and has a good chance of beating the RBA’s forecast of 2.0% by June 2017.
However, the rise in housing prices was one of the major drivers for the annual reading and accounted for 0.2% (or almost half) of the 0.5% quarter-on-quarter rise in headline CPI.
Speaking of housing, let’s move on to the potential housing bubble that the RBA keeps bringing up. And in the April RBA minutes, the RBA reiterated the warning that:
“Growth in housing credit continued to outpace growth in household incomes, suggesting that the risks associated with the housing market and household balance sheets had been rising.”
That still seems to be the case. In fact, things may have gotten worse, since the acceleration in housing credit has been due mainly to the rise in housing credit to investors. In other words, very likely speculative in nature.
All the while personal credit continues to fall and wage growth is decelerating. The following warning from the RBA’s February Statement of Monetary Policy therefore still holds true:
“If households believe that their prospects for future income growth have weakened, particularly for those households servicing sizeable debts, then they could choose to save more in the near term and consumption growth could be lower than forecast.”
Overall, a rather mixed picture for Australia with strong trade and signs of a continued shift away from a resource-oriented economy to a more service-oriented one. But at the same time, wage pressure is not very impressive and the threat of a potential housing bubble is still there.