Independent Australian and global macro analysis

Tuesday, July 31, 2018

Australian building approvals show resilience in June

Australian Building Approvals rebounded in June, posting a sharp increase that well exceeded market expectations. 

Building Approvals  June | By the numbers

  • Total Dwelling Approvals increased by +6.4% to 19,133 vs market expectations for a smaller rise of +1%. After revisions, approvals in May fell by -2.5% — lower than the initial estimate of -3.2%.
  • House Approvals increased by +4.4% to 10,179. Last month’s outsized decline was trimmed to -7.9% from -9.0% after revisions.
  • Unit Approvals increased by +8.9%m/m to 8,954. Revisions saw the previous month’s estimate little changed at +4.6% compared to the initial result of +4.7%.

Building Approvals  June | The details

June’s headline increase (+6.4%) comes in the context of declines in both April (-6.0%m/m) and May (-2.5%). That weakness saw total dwelling approvals decline by -5.4% in Q2 to 55,559.

Annual growth has softened to just +1.6%, which compares to the recent peak in December 2017 of +13.2%. However, in total, dwelling approvals in the 2017/18 financial year remained at a strong level coming in at 230,721.

The trend data, which smooths the volatility, confirms that dwelling approvals continue to track at a strong level but have certainly eased from late last year.  

Across the states, volatility was elevated with some sharp movements   particularly in QLD (+37.7%m/m) where house approvals lifted +26.5% following a fall of -19.2% in May. This clearly impacted the national result in June; approvals growth excluding QLD was just +0.7%m/m.

June (m/m)
Q2 (q/q)
Annual (Y/Y)
  Based on ABS 8,731.0  

For alterations and additions, the value of approvals fell by -10.1%m/m and by -5.2% in Q2. 

Non-residential approvals by value fell by -7.0% in June for a quarterly fall of -11.8%.   

Building Approvals  June | Insights

The outlook for residential construction activity is faced with headwinds from property prices which are in decline on a national basis according to CoreLogic’s latest monthly Home Value Index, while auction clearance rates have also slowed dramatically in 2018 to a range of around 50-60% in Sydney and Melbourne. These concerns are heightening when also considering recent tightening that has occurred in lending standards, and this has been linked to a slowing in the ABS Housing Finance data. For now, though, building approvals remain resilient at elevated levels, which points to the risk of a slowing in residential construction activity being delayed.   

Sunday, July 29, 2018

Australia's soft inflationary pulse continues

Australia's Consumer Price Index (CPI) data came in softer than anticipated in the June quarter (Q2), with little sign of a shift in the inflationary environment.  

CPI  Q2 | By the numbers

  • Headline inflation in Q2 printed at +0.4% and +2.1%Y/Y, which was below the median market forecasts for +0.5%q/q and +2.2%Y/Y (prior +0.5%q/q and +1.9%Y/Y)
  • Core inflation (trimmed mean and weighted median seasonally measures) was essentially as expected averaging +0.46%q/q and +1.87%Y/Y (exp: +0.5%q/q and +1.9%Y/Y)

For headline inflation, this made it 7 consecutive quarters where the quarterly figure was below the expected outcome.

Of more relevance from an RBA policy perspective, core inflation slowed in today’s data to +1.87%Y/Y from an upwardly revised pace of +2.01%Y/Y in Q1. This sits a touch below the RBA's forecast (+2.0%Y/Y) published in May's Statement on Monetary Policy, which also show that a lift in core inflation is not seen until mid-2020 (+2.25%Y/Y).

CPI  Q2 | The details

The main contribution to inflation in Q2 came from a strong rise in petrol prices (+6.9%), which added +0.24ppt to the quarterly figure.   

Next most was Health, due mainly to the annual increase in premiums for private health insurance (+3.1%). Alcohol and tobacco prices lifted 1.6% in Q2, with tobacco adding +0.09ppt to inflation and alcohol +0.03ppt.  

The Housing group added a soft +0.03ppt to inflation, with rises for new dwellings (+0.8%) and maintenance (+0.4%). Rents and rates and charges were flat (0.0%), while Utilities fell (-1.2%) on weaker power prices. 

Food and non-alcoholic beverages prices were down -0.4% on the quarter (+0.3Y/Y), which reflected falls for vegetables (-2.9%) and fruit (-2.5%).

Highlighting the intensity of retail competition, prices over the past year fell for appliances -3.1%Y/Y, clothing -3.0%Y/Y, footwear -3.0%Y/Y, furniture -2.7% and vehicles -2.2%Y/Y.  

Looking more broadly, inflation of tradables — from imported sources (accounting for around 35% of the CPI figure) — lifted +0.5% in Q2 but is little changed over the year (+0.3%). This has provided some offset to non-tradables inflation — influenced by domestic factors — although, this softened in Q2 to +0.3 and +3.0%Y/Y.

Separating the impact of areas which are impacted by government policy — from price increases in alcohol, tobacco and private health insurance premiums, the underlying inflationary environment remains muted. 

Inflation for ‘market goods and services ex-volatile items’ — a guide to private sector inflation influenced by demand and supply factors — increased just +0.2% in Q2, and is +1.1%Y/Y in a result that is unchanged from the previous two quarters. 

CPI  Q2 | Insights

Overall, Australia's inflationary pulse remains soft with core inflation back below the RBA's lower target. There was little in Q2's data to indicate that core inflation is set to firm notably over the near-term. Stronger wages growth likely remains the key link, and markets will be looking ahead to the release of the Wage Price Index for Q2 (15/8), which will need to show a sustained strengthening over the quarters ahead to help lift core inflation up into the target range. Cash rate futures are not fully priced for a rate increase for at least the next 18 months.