January, 2014

Assessing the future of the Lucky country

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Assessing the future of the Lucky country

Australia is often described as the lucky country.  A 16 year long mining boom has certainly helped economically, but with recent declines in both commodity prices and mining investment, will this luck continue? Today we look through the latest data on the Australian economy to see if our luck has finally run out.

Growth is present, but below recent trends. The economy grew by 0.6% over the June 2013 quarter, which was an increase of 0.1% on the March quarter. This brings the annual growth rate to 2.6% pa, or $1.49 trillion over the past year. It is expected that GDP growth will remain at or just below this level into the near future as the economy responds to declines in mining investment.

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Decline in mining investment will have major consequences for long term GDP growth. As shown in the graph below, mining investment contribution to GDP has plunged into negative figures whilst net exports has now emerged as the largest contributor. This is a significant turnaround, but logical as massive investments in mining assets and infrastructure begins to produce commodities for export – particularly iron ore and coal. As shown by the Chinese miracle economy however, continued investment is the key to continued prosperity and it is critical that Australia finds new industries to take over the investment role within the economy and GDP growth contributors.

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Inflation is not a problem for the RBA at the moment. All groups inflation increased by 1.2% over the September 2013 quarter and is currently sitting comfortably within the RBA’s target band at 2.2% pa, with the average of the trimmed mean and weighted median at 2.3% pa. Unlike the EU and USA, the RBA has no fear of disinflation let alone deflation.

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Some CPI components are increasing much higher than the headline rate. The costs of education, health and housing have increased by almost double the headline CPI rate. This is significant because these are essential services required by all households.  Alcohol and tobacco prices have also increased by 4.0% pa.

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Unemployment down, but on a trend to increase. National unemployment was 5.6% in September 2013. This is down from 5.8% in August, but is 0.1% higher than what it was a year ago. While the graph below shows a general downward trend in unemployment since the early 1990s, the right hand side of the graph shows an uptick in the number of unemployed in recent years and the RBA expects further increases in the New Year. Currently, Tasmania is suffering the highest level of unemployment at 8.5%, and the ACT has the lowest at 4.1%.

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More part time than full time positions created. The 12 months to September 2013 has seen full time employment fall by 5,200 persons. This is in stark contrast to the annual increase of 112,600 over the same period in 2012. Part time employment has increased substantially by 100,700 persons over the last year, compared to an increase of 9,500 persons over the same period in 2012. The trend is clear: more unemployed, less full time positions and more part time positions. This does not bode well for an economy in transition and may reflect a lack of confidence in the businesses community about the medium term.

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RBA keeping their options open. The RBA kept official interest rate steady at 2.5% in their September, October and November board meetings, consistent with their assessment that the rate decrease in August has been supporting interest sensitive sectors and will continue to do so for some time. This is the lowest rate since the RBA was established in 1959. The RBA has not ruled out further decreases should that be necessary to support economic activity.

The flow on effect of the August rate cut has been a decrease in the standard variable mortgage rate to 5.95%, with the discounted variable rate at 5.10% and the average three-year fixed rate also at 5.10%. Rates have not been this low since the late 1950s and early 1960s, and have helped to boost the housing market and construction sectors.

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Households have been saving more, despite lower interest rates. The household savings ratio was up 0.3% to 10.8% for the June 2013 quarter. This is also above the average 10.1% over the past five years, and well above the average 2.0% over the five years previous. This suggests households are becoming more prudent with their spending decisions, and focused on deleveraging significant debt positions built up prior to the GFC.

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Consumer sentiment dipped in October, but remains strong. The index of consumer sentiment dipped between September to October, reducing from 110.6 to 108.3 points. Despite this, the current index remains above the six-monthly average of 104.4 points. This indicates that consumers have become more optimistic than pessimistic over the recent period, however sentiment is yet to reach the highs of 2005, 2007 or 2009.

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Positive consumer sentiment has had real influence on sales transactions. This makes sense, as people are more likely to spend on high commitment purchases if confidence is high. The uptick in sales is clearly evidenced at the far right hand side of the graph. This shows that the housing market has been energized by expansionary monetary policy.

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Consumer sentiment has influenced home values. A strong correlation exists between the annual change in the six-month average consumer sentiment and the annual change in capital city home values. If sales are increasing and there is an improvement in confidence you would anticipate that increase to also push home values higher. This is exactly what we have seen in recent months.

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Number of first homebuyers in housing market remains extremely low.

The number of first homebuyers finance commitments has fallen by -12.5% over the month of August and -21.8% over the past year. As a proportion of all owner-occupier housing finance commitments, first homebuyers fell to 13.7%, which represents the lowest proportion since April 2004. Undoubtedly, rising prices and reduced job prospects are turning first homebuyers away.

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Private sector housing credit growth inches higher. The total of outstanding private sector housing credit increased by 4.8% over the 12 months to September 2013. This constitutes only a 0.4% increase above the record low of 4.4%. The growth in owner-occupier housing credit increased by 4.2%; this was outpaced by growth in credit for investment housing at 6.1%. While the graph below shows an overall downward trend for private sector housing credit, we expect the next few months to break this trend as more people take advantage of low interest rates and increased house sales activity translates into new housing loans.

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Overseas migration is increasing, fuelling population growth. It is clearly discernible from the graph below that natural population growth has effectively plateaued. Overseas migration is generating Australia’s population growth. The mid 2000’s saw substantial increases in migration, before dropping off following the financial crisis of 2008. We have seen a turnaround in this drop off since 2010. Over the 12 months to March 2013, Australia’s population increased by 1.8%. Interestingly, Deputy Governor of the RBA Phillip Lowe has suggested that population growth is one of the reasons to be optimistic about business investment picking up in the medium term.

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Conclusion

Australia has certainly been a lucky country historically however as the latest data indicates, Australia will have a rocky road ahead if the housing market is the only sector responsive to expansionary monetary policy.  We need long-term sustainable investment to not only cater for current Australians but also for those who will boost our population in the future. The future of Australian prosperity has less to do with luck and much more to do with the right investment mix as the mining investment boom of recent years shifts into extraction and export mode.  As yet, no one has taken the cue.