Business Indicators; New home sales; Private sector credit
What does it all mean?
The latest economic data highlights the balancing acts being played out in the Australian economy. Mining is in transition from booming investment activity to the production phase of the cycle. As a result mining profits and sales fell in the latest quarter. But while mining profits are retreating, profits in other parts of the economy are rising, in fact hitting record highs.
There is also the balancing act in the housing sector. Financial authorities want to see less frothy growth in investor housing lending, but at the same time want to maintain lending growth in business and owner-occupier home lending. The good news is that this is also happening.
So from the Reserve Bank’s standpoint there is nothing to do but to monitor the transitions to ensure that the process moves as smoothly as possible.
What do the figures show?
Private sector credit
What is the importance of the economic data?
The quarterly Business Indicators publication by the Australian Bureau of Statistics (ABS) contains measures such as inventories, company profits and income from sales. Higher inventory (stock) levels can be either intentional or unintentional. If stocks are low and sales are expected to rise in the future, businesses will seek to build up stocks. However an unintentional build-up in stocks is where sales fall short of expectations, leaving more goods on the shelves than desired. If profits are increasing then this may point to increased capital spending and employment in the future. Rising profits are also a sign of favourable business conditions.
Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.
The Housing Industry Association releases data on the sales of new homes each month. The HIA collects the data each month from a sample of Australia's largest 100 home builders. The survey covers around 14% of the home building industry.
New home sales
New home sales fell by 0.4% in July. Sales of multi-units fell by 4.2% while detached house sales rose by 0.7%.
The Housing Industry Association reported: “In the month of July 2015 detached house sales increased by 4.2% in New South Wales. Detached house sales fell by 2.3% in Victoria and by 4.9% in Western Australia. Sales were close to flat for the month in Queensland (-0.6%) and South Australia (-0.2%).”
“The annual peak for detached house sales has passed. Over the three months to July this year detached house sales fell by 2.8% to be 3.4% lower when compared to the three months to July 2014.”
“‘Multi-unit’ sales peaked in May this year and fell by 4.2% in July following a decline of 2.9% in June. Over the three months to July this year multi-unit sales increased by 8.3 %, but it was the strength of the May result that drove the quarterly outcome.”
What are the implications for interest rates and investors?
The Australian economy is evolving as best as can be expected. There is no need for the Reserve Bank to either lift rates or cut rates in the current environment.
Our review of the profit-reporting season showed that corporate Australia remains in good shape. While profits are understandably down in mining and engineering sectors, they are up in consumer and housing-dependent areas. Bottom-line earnings are generally improving despite the fact that a large number of companies have taken the opportunity of favourable financials to write down the value of assets such as intangibles.
Over the last seven years the Australian economy has experienced the biggest structural swings in a century. Mining investment and prices soared; resource prices retreated; mining investment was completed; mining production has ramped up to record highs; interest rates fell to record lows; and home building approvals hit record highs. Major swings and transitions have already occurred and the process is a long way from over.
The Reserve Bank can feel justifiably happy about how the process has gone so far.
Published: Tuesday, September 01, 2015