Independent Australian and global macro analysis

Friday, August 31, 2018

ASX200 August Scorecard

Australia's S&P/ASX200 index closed the end of August at 6,319.5, which equated to a gain of 0.63% in the month. This follows gains of 1.38% in July and 3.04% in June. 

Overall, the benchmark index sits at around decade highs.

The breakdown of the industry sectors is shown in the chart, below. Most sectors found gains in August, but weakness from the two largest sectors — Financials and Materials — held the broader index back.

The Australian dollar has declined by around 2.6% against the US dollar in August and by around -2% on a trade-weighted basis.

Thursday, August 30, 2018

Australian private sector credit growth moderating

Australian private sector credit growth came in ahead of expectations in July but continues to show signs of moderating.  

Private Sector Credit — July | By the numbers
  • Total private sector credit growth lifted by +0.4%m/m vs the market expectation for +0.3% (prior was +0.3%)
  • Annual growth was +4.4%, unchanged from June after allowing for a downward revision from +4.5%

Private Sector Credit — July | The details 

Looking across the categories the detail was;

  •  Housing; +0.4%m/m, +5.5%Y/Y (prior +0.3%, +5.6%)
    • Owner-occupiers; +0.5%m/m, +7.6%Y/Y (prior +0.6%, +7.8%)
    • Investors; +0.1%m/m, +1.5%Y/Y (prior -0.1%, +1.6%)

  • Business;  +0.5%m/m, +3.4%Y/Y (prior +0.3%, +3.2%)

  • Personal; -0.1%m/m, -1.4%Y/Y (prior 0.0%, -1.3%) 

Private Sector Credit — July | Insights  

Total credit growth at the annual pace of +4.4% is the lowest since March 2014 the prevailing RBA cash rate was 2.5%, but it has been 1 percentage point lower than this (at 1.5%) for 2-years now. 

In the housing sector, annual growth eased further with softening from both owner-occupiers and investors, the latter now at just +1.5% — its lowest in the history of this series. These developments reference a cooling in residential property market conditions, tighter financing criteria — particularly for investors — following regulatory changes from APRA, while income growth remains persistently soft. 

Annual credit growth from the business sector has been fairly volatile over the past year, averaging an annual pace of +3.7%. July's outcome (+3.4%) was slightly below this mark. Surveyed business conditions have been well above-average over recent quarters helped by rising profitability, while investment from the non-mining sectors has been improving — though, yesterday's Q2 CapEx data was less encouraging. Increased profitability has, perhaps, reduced the reliance on credit somewhat.   

Personal credit remains out of favour and declined further in July and over the past year.   

Australian building approvals rollover in July

Australian building approvals fell sharply in July, which largely reversed a broadly strong result from last month. This saw the resumption of the recent trend of slowing momentum in building approvals. 

Building Approvals — July | By the numbers
  • Total Dwelling Approvals fell -5.2%m/m to 18,185 vs market expectations for a fall of -2%. Approvals in June were revised up to +6.8%m/m from +6.4%.
  • House Approvals fell -2.8%m/m to 9,845. Growth in June was lowered to +3.8% from +4.4%.
  • Unit Approvals fell -7.8%m/m to 8,340. Approvals last month were revised to +10.4% from the initial estimate of +8.9%. 

Building Approvals — July | The details

Despite a spike in June the momentum in building approvals continues to tilt lower, with July's result showing declines on both a seasonally adjusted (-5.2%m/m) and trend (-1.3%m/m) basis. On an annual basis, building approvals turned negative on both measures for the first time since August 2017; -5.6% (sa) and -2.5% (trend).

The weakness was broad-based in July; houses -2.8%m/m (trend -1.1%) and -3.5%Y/Y (trend -0.8%), units -7.8%m/m (trend -1.6%) and -8.0%Y/Y (trend -4.5%).

Looking at the state detail, declines of a similar magnitude were recorded in the month for the three largest states; New South Wales (houses +0.8%, units -3.2%), Victoria (houses -2.4%, units -7.0%) and Queensland (houses -12.1%, units flat). The more severe declines in South Australia and Western Australia were impacted by a sharp drop in capital city unit approvals. Strengthening house approvals drove the result in Tasmania.  

July (m/m)
Annual (Y/Y)
 Based on ABS 8,731.0

The ABS reported that the value of non-residential building approved jumped by 31.5% in June, while the value of alterations and additions lifted 6.3%. 

Building Approvals — July | Insights 

Slowing momentum in building approvals presages a softening in residential construction activity, which would be in-line with the weakening seen in related data for housing finance and property prices. The near-term outlook is, however, supported by an elevated pipeline of work already under construction — particularly from units in Sydney and Melbourne.    

Australian CapEx weakens in Q2

Australia’s Capital Expenditure (CapEx) survey for the June quarter disappointed market expectations weighed by late-cycle weakness from the mining sector, while investment from the non-mining sectors endured its softest quarterly result in almost 2-years.

Meanwhile, the latest estimate for planned CapEx in the 2018/19 financial year was around economists forecasts, however, investment is expected to decline over the current financial year.

CapEx — Q2 | By the numbers
  • Actual CapEx in Q2 fell -2.5%q/q to $A29.098bn (+0.4%Y/Y), with the median market forecast at +0.6%q/q. In positive news, growth in CapEx from Q1 was upgraded on revision from +0.4%q/q to +1.2%q/q.  
  • By asset in Q2; CapEx on equipment, plant and machinery (GDP input) fell by -0.9%q/q, while buildings and structures fell -3.9%q/q

  • Estimate 3 for CapEx in the 2018/19 Financial Year was upgraded by +16.1% to $A102bn (previous estimate was $A87.88bn). This is still -1.1% on estimate 3 from last year.

CapEx — Q2 | The details 

Total CapEx declined by $750m, or -2.5%, in the quarter to $29.098bn. This mostly reflected weakness from the mining sector, where investment fell by $638m (-7.2%q/q), dragged by reduced construction spending (-9.6%q/q) as major LNG projects move further towards completion. There was, however, some offset from equipment spending (+6.7%q/q).

Non-mining sector CapEx was also weak, declining by $113m, or -0.5% in Q2. This was the weakest quarterly result since September 2016, though annual growth is at +5.8%. Breaking this down further; 
  • Services industries CapEx fell $177m (-1%) on weaker equipment spending (-1.9%), while construction lifted (+2.9%)
  • Manufacturing saw a rise of $64m (+2.7%) from stronger investment in equipment (+4.8%) and construction (+0.5%)  

Looking ahead to the end of the 2018/19 Financial Year, investment intentions from surveyed firms (Estimate 3) totaled $A102bn, which is 16.1% above their previously estimated figure. 

However, at this level, CapEx intentions are 1.1% lower when compared to the same estimate for the 2017/18 Financial Year.

The CapEx outlook is still weighed by falling investment from the mining sector, although the trough is close with major projects under construction in the LNG sector nearing completion. Q2's survey pointed to mining investment falling a further 4.2% (-$1.39bn) in the current financial year. 

Non-mining investment was only anticipated to lift by +0.4% ($277m) in 2018/19, with manufacturing +3.1% ($257m) compared to +6% in estimate 2  and services flat ($20m) est 2 was +5%.   

CapEx — Q2 | Insights  

Today's data was disappointing with CapEx falling in Q2 as well as the decline from equipment, plant and machinery. The outlook for non-mining investment in the current financial year was also softer than the previous survey. 

While the CapEx data only accounts for around 60% of private sector business investment  it excludes major industries such as health, education and agriculture   it points to a soft contribution towards that component in next week's Q2 GDP data.  

Wednesday, August 22, 2018

Australia's construction cycle powers on in Q2

Construction data from the ABS for the June quarter came in well ahead of the market forecast, with residential and public infrastructure work set to support GDP growth in Q2.  

Construction Work Done — Q2 | By the numbers
  • Total Construction Work Done in Q2 increased by +1.6% to $A53.588bn, which exceeded market expectations for a rise of +0.8%. Revisions saw a sizeable upgrade to Q1, from +0.2% to +2.4% — mostly attributable to the residential sector.
  • Annual growth in Construction Work Done was broadly flat (-0.1%)

Construction Work Done — Q2 | The details

The headline detail saw gains across all categories (including both the private and public sectors) in Q2; residential up +3.1% — after a revised +3.9% in Q1 — non-residential +1.3% and engineering +0.4%. 

Breaking this down further, in the private sector; residential construction increased +3.2% q/q (+5.8%Y/Y) and non-residential (commercial projects) lifted +0.9%q/q (+5.2%). This equated to an overall gain of +2.6% in building work in Q2. 

However, there was a decline in engineering (infrastructure projects) of -1.1% (-19.5%Y/Y) — volatility has been heightened in this category recently due to the import of LNG platforms.

In the public sector, infrastructure increased by +2.6% (+18.1%Y/Y) — reflecting an ongoing upswing in Victoria and NSW. Building work was up +2%q/q (+14.5%Y/Y). 

The state detail, covering both the private and public sectors, is summarised in the table, below. NSW and Victoria are leading across the board, while South Australia is also supporting. 

Based on ABS 8,755.0

Construction Work Done — Q2 | Insights 

This was a strong outcome from residential work, particularly when taken with the revisions to Q1. While there have been concerns raised around the outlook for residential construction due to signs of a cooling in the national housing market, the RBA anticipates the sector to support growth over the near-term due to an elevated level of work in the pipeline. Recently, dwelling approvals have shown resilience against those headwinds, with strong population growth a key factor.     

Investment in public infrastructure is also set to remain supportive of growth, with major transport-related projects underway in Sydney and Melbourne to assist with accommodating the growth in population. 

Friday, August 17, 2018

Australian labour market conditions little changed in July

Volatility was evident in the ABS’ Labour Force Survey for July, however underlying conditions in Australia's labour market remained broadly unchanged.  

Labour Force Survey — July | By the numbers
  • Net Employment fell by -3,900 in July — the market forecast was for +15,000. June’s initially reported increase in employment of +50,900 was upwardly revised to +58,200
  • Unemployment rate eased to 5.32% from 5.35% (market f/c was 5.4%)
  • Participation rate decreased -0.14ppt to 65.54% (prior 65.68%)
  • Hours worked lifted +0.2%m/m, increasing to the annual pace to +2.3% 

Labour Force Survey — July | The details

Volatility was a theme throughout these data for July. On a seasonally adjusted basis, full-time (FT) work increased by +19,300 but that was eclipsed by a decline of -23,200 in the part-time (PT) segment. The net result was that headline employment fell by -3,900. 

Given this, it may have appeared odd to see the ABS report a decline in the national unemployment rate, from 5.4% to 5.3%. However, while employment fell -3,900 in the month, the detail revealed a larger decline in the size of the labour force of -9,600, so as a result, the total of unemployed fell by -5,700. Rounding was also a factor — if taken at 2 decimal points the unemployment rate was essentially unchanged at 5.32% compared to 5.35% in June.

Somewhat strangely, hours worked in the economy lifted +0.2% in July, which increased growth over the past year from +1.7% to +2.3%. Across 2018, though, growth in hours worked has been gradually trending lower.

The pace of employment growth has been easing in 2018, and July's result saw this trend continue with annual growth now at +2.45%. In this cycle, employment growth looks to have peaked in January at a touch above +3.5%. As of July, growth in FT work lifted to +2.3%Y/Y and PT fell by a sizeable -2ppts to +2.7%, although the latter is highly volatile.

Overall, the pace of employment growth is still solid and remains above growth in the working-age population (around 1.6%Y/Y). This dynamic continuing is key to reducing excess capacity in the labour market. 

Looking across the states, as the chart, below, shows, the overall change in employment was dominated by movements in NSW (-27,100) and Victoria (+29,400). There were only marginal changes in the other states.  

There were some more notable moves, though,  in state unemployment rates in July; Victoria -0.6ppt to a 6.5-year low of 5.0% and a sharp -1.2ppts over the past year, while Tasmania (+0.5ppt) and South Australia (+0.03ppt) went the other way. The unemployment rate in NSW edged up to 4.9% but is little changed over the past 3-months and year.  

State Unemployment Rates (sa, based on ABS 6,202.0)


m/m change

3-mth change

Y/Y change













Labour Force Survey — July | Insights

Volatility was elevated in July's data due to factors associated with sample rotation referring to the methodology the ABS uses in conducting the survey.  

For July, the outgoing group had higher participation and employment rates than the sample, while the incoming group had a higher unemployment rate and a lower participation rate than the sample. This explains the decline in employment and participation recorded in July. 

Taking last month's outsized gain of +58,200 and July's -3,900, employment averages out at +27,200 per month. The trend data showed employment up by +26,900 in July — slightly stronger than June's +25,000  while the unemployment (5.4%) and participation rates (65.5%) on that basis were steady.  

Overall, after looking through the volatility, underlying conditions in Australia's labour remained broadly steady in July. However, few had forecast a fall in employment for this survey, and given that employment growth is easing, outcomes of this nature in the coming months would give cause for concern.