Independent Australian and global macro analysis

Friday, June 28, 2019

Macro (Re)view (28/6) | Markets focused on G20 developments

Attention in financial markets over recent sessions was focused on the weekend's G20 Summit in Osaka following confirmation that US President Trump and China's President Xi will meet on Saturday morning local time. Conflicting news reports have conditioned low expectations for substantive progress to be made in easing the tensions that have escalated since May. As it stands, China has called for compromise and the removal of existing tariffs, though US President Trump vowed again this week to tariff the remaining tranche of some $325bn of Chinese produced goods if sufficient progress is not made. A best-case scenario would appear to be an agreement to re-commence the negotiations that stalled in May, and potentially a truce on imposing new tariffs.

Also dampening sentiment this week, US Federal Reserve Chair Jerome Powell appeared to push back against some of the more aggressive expectations for policy easing during a speech in New York. While highlighting that the cross-currents relating to trade tensions and global economic growth have re-emerged, Chair Powell went on to say that the central issue for the Committee "is whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation". Markets had discounted more than one rate cut occurring at the next meeting in July, so it was significant that Committee member and noted dove James Bullard said during a Bloomberg interview that a rate cut of 50 basis points "would be overdone" but was supportive of a 25 basis point cut. 

Notwithstanding the downside risks to the outlook, Chair Powell noted that "the economy has performed reasonably well" in 2019, as highlighted by Q1 GDP growth being confirmed at an annualised pace of 3.1% during the week. However, as our chart of the week (below) shows, output growth in the March quarter was underpinned by the typically volatile components of inventories and net exports and can thus be expected to reverse. Consumer demand also softened, and while business investment remained solid that pre-dates the latest escalation in trade tensions.  

Chart of the week

In Europe, while the data flow was limited this week, the tone was in line with last week's comments from European Central Bank (ECB) President Mario Draghi that additional stimulus measures will likely be required. The European Commission's Economic Sentiment Indicator fell to a near 3-year low in June at a reading of 103.3 reflecting weakness from industry, services, and consumers. Meanwhile, inflation on a headline (1.1%Y/Y) and core (1.2%Y/Y) was essentially as expected in June, though it remains well short of the ECB's target of below but close to 2%.          

The other notable development from abroad this week was the Reserve Bank of New Zealand's latest policy meeting in which the cash rate was left on hold at 1.5% (see here). Having cut interest rates in May, the Bank's Monetary Policy Committee retains a firm easing bias on the basis that the economic outlook, both domestically and abroad, had softened and thus presented downside risks to its employment and inflation objectives. As such, it was the assessment of the Committee "that more support from monetary policy was likely to be necessary". 

— — 

Economic developments and data in Australia were light this week, while domestic markets were contained. Of note, Reserve Bank of Australia (RBA) Governor Philip Lowe featured in an ANU-hosted panel discussion (link here), outlining that in the current environment of global policy easing, the stimulatory impact of further reductions in the cash rate on the domestic economy is likely to limited due to a lesser depreciation in the exchange rate, while the benefit to the other transmission mechanisms (investment, wealth and cash flow) was described as "weaker at the moment". To that end, Governor Lowe reiterated the case for increased stimulus in the form of fiscal and structural reforms. Ahead of next Tuesday's RBA policy meeting, financial markets are around 75% priced for a 25 basis point rate cut, which is also the consensus call from economists according to Reuters. 

The main data point out this week was May's private sector credit growth figures (see here). The pace of credit growth slowed from 3.7% from 3.6% in through-the-year terms to a 5½-year low. For the 4th consecutive month, housing credit growth slowed to the lowest pace on record going back to the late 1970s at 3.7%Y/Y. Growth to the owner-occupier segment eased to 2015 levels at 5.3%Y/Y, while investor growth hit another record low of just 0.5%. Business credit growth remained unchanged at 4.5%Y/Y. 


Friday, June 21, 2019

Macro (Re)view (21/6) | Doves take control

A broad-based preparedness from central banks across the globe to move to more accommodative structures is now on earnest in response to growth and inflationary concerns. The expectation that lower interest rates will be forthcoming compressed bond yields across respective countries' curves to multi-year lows and buoyed equity markets to strong gains this week. Given the recent intensification in US-China trade tensions, developments stemming from negotiations between President Trump and President Xi at next week's G20 Summit in Osaka will be closely followed by markets and policymakers alike. 

The US Federal Reserve's (Fed) latest meeting headlined developments this week by marking a notably dovish shift in tone (see here). While still retaining a constructive baseline view for the US economic outlook, "increased uncertainties and muted inflationary pressures" prompted the Committee to remove its "patient" guidance used throughout 2019 to a stance where it will now "act as appropriate to sustain the (economic) expansion, with a strong labour market and inflation near its symmetric 2 percent objective". 

Underlining this shift, 8 of 19 Committee members expected rates to be cut this year, with 7 of those projecting 50 basis points of easing and the remaining voter seeing one rate cut. In sum, that was one shy from seeing the median projection for 2019 lowered from the present 2.25-2.5% setting (shown as our chart of the week, below), though the risks are to the downside with Fed Chair Powell saying in the post-meeting press conference that "a number of others see the case (for rate cuts) is strengthened". For 2020, the median projection implies the Committee will ease -- a complete reversal from just 3 months ago when the signal was for a rate hike.  

Chart of the week
There is now also an increased willingness from policymakers to support the euro area economy as outlined by European Central Bank (ECB) President Draghi during an address at its annual forum in Sintra. The message from the ECB's meeting 2 weeks ago was that the Governing Council was "determined to act in case of adverse contingencies", though in a surprise to markets that outlook was strengthened by President Draghi on Tuesday, highlighting that "additional stimulus will be required" unless they observe an improvement in the data flow. As President Draghi outlined, all stimulus options are under firm consideration including restarting net asset purchases and interest rate cuts. 

The Bank of England has yet to join the dovish shift, with the decision statement from its latest meeting this week continuing with its expectation for "gradual" and "limited" tightening in monetary policy. The Bank's assessment is that in response to tight labour market conditions and strength in wages growth, inflationary pressures will begin to emerge. However, that view remains conditioned on an orderly Brexit transition, which in itself is far from certain.

Rounding out the week from abroad, the Bank of Japan maintained its policy stance but is clearly alert to the downside risks posed to the domestic economy -- most notably in its export sector -- by the escalation in global trade tensions (and by further strengthening in the Yen). Governor Kuroda said the Bank's Policy Board would "consider expanding stimulus without hesitation", which could include expanded asset purchases and lower interest rates.

— — —
In keeping with the global theme, it was the Reserve Bank of Australia (RBA) that gained most of the focus domestically this week. June's meeting minutes conveyed that the Board's outlook for the Australian economy "remained reasonable" supported by an expected lift in household income, public investment and resources exports. The minutes also highlighted that the decision to cut the cash rate by 25 basis points earlier this month was prompted by a revised assessment of the labour market, now seeing that a much lower unemployment rate of around 4.5% can be sustained without generating inflationary concerns. Given that the unemployment rate lifted to 5.2% in April (and remained unchanged in May) members concluded that "it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead".

That could occur as early as the next meeting, with markets increasing the probability for a rate cut on July 2 to around 75% from around 50% following a speech from RBA Governor Lowe in Adelaide on Thursday. Therein, more insight was provided on the various perspectives taken by the Bank to assess the extent of spare capacity in the labour market. Notable insights were that the labour supply in Australia is highly flexible to increases in demand, while wages growth is running well below a pace consistent with inflation returning to the Bank's 2-3% target range.

With the RBA now setting its sights on driving the unemployment rate lower, Governor Lowe signaled a clear preparedness for additional easing by noting that it would be "unrealistic to expect that lowering interest rates by ¼ of a percentage point will materially shift the path we look to be on". Strengthening that view, the Governor saw no sign from May's labour market data or Q1's national accounts that progress on reducing excess capacity was being made and thus "the possibility of lower interest rates remains on the table". Current expectations between financial markets and economists are for the cash rate to fall to 0.75% by year's end. 

Monday, June 17, 2019

Australian property prices down by 3% in the March quarter

Conditions in Australia's residential property market cooled further since the turn of the year according to the latest ABS Residential Property Price Index data. Prices fell in every capital city in the March quarter, while the national weighted average declined by 3.0% in Q1 to be down by 7.4% through the year.    

The detail across the capital cities in Q1 was;

  • Sydney -3.9% (-10.3% in year-on-year terms)
  • Melbourne -3.8% (-9.4%)
  • Brisbane -1.5% (-1.3%)
  • Adelaide -0.2% (+0.8%)
  • Perth -1.1% (-2.7%)
  • Hobart -0.4% (+4.6%)
  • Darwin -1.8% (-4.2%)
  • Canberra -0.9% (0.0%)
  • Weighted-average of capitals -3.0% (-7.4%) 

The table, below, shows the price movements in each capital city for houses and units.

The next chart shows the price index for each capital over the history of the series. 

On an average weighted basis, Australian property prices have been declining for 5 consecutive quarters since the most recent peak in Q4 2017. That has largely been driven by Sydney and Melbourne, though that weakness now extends to the other capital cities where prices are also declining.

Accordingly, the ABS estimates that the total value of residential housing fell by 2.6% in the March quarter to $A6.6 trillion and has declined by 5.6% across the year.  

The ABS' indexes are released quarterly and are compiled using data provided by CoreLogic. In that sense, this series is seen very much as a lagging indicator given that more timely updates are provided monthly by CoreLogic. May's update showed that the national median price fell by 0.4% in the month and by 7.3% across the year (see here). Furthermore, there have been a number of key recent developments that are not reflected in the ABS' indexes, which include; the Reserve Bank of Australia's June rate cut, banking regulator APRA's proposal to ease loan serviceability assessment criteria and the federal election outcome removing uncertainty around changes to tax policy. Recent auction clearance rates have also improved in Sydney and Melbourne, though off lower volumes.   

Friday, June 14, 2019

Macro (Re)view (14/6) | Excess capacity key for the RBA

The Reserve Bank of Australia (RBA) remains on track to lower the cash rate further this year after this data this week confirmed that excess capacity in the labour market remains elevated. In line with other major economies, the RBA has come to accept that Australia's level of 'full employment' is now lower than its previous estimates. An in-depth insight into the Bank's thinking behind this important shift was provided this week in a speech by the RBA's Assistant Governor Luci Ellis (see here).

As outlined therein, while the non-accelerating inflation rate of unemployment (NAIRU) or 'full employment' concept is inherently unobservable, the signals from the data flow have led to the Bank concluding that Australia's labour market is essentially operating below capacity. The RBA's current estimate is that the unemployment rate can fall to around 4.5% before wage and inflationary pressures will begin to build hence why the Bank is now easing the cash rate.

With that in mind, the key focus of the week was May's Labour Force Survey. Employment increased by a net 42,300 in the month -- much stronger than the 16,000 rise forecast by markets -- while April's initially reported figure of 28,400 was revised up to 43,100 (for a full review of May's report see here). This drove overall employment growth to 2.88% over the year -- its fastest pace since March 2018. However, while employment growth is robust, participation is strongly on the rise hitting a new record high of 66.0% in May. As a result, the unemployment rate remained in check at 5.2% (shown as our chart of the week, below) and highlights the high hurdle to lowering excess capacity in the prevailing conditions. 

Chart of the week 

Last week's National Accounts highlighted that private sector demand was soft in Q1 (see here) and that appears to remain the case in the current quarter according to the NAB's latest Business Survey for May. While business confidence spiked to a +7 reading from 0 in response to the federal election outcome, the conditions index fell from +3 to +1 to a now well below-average level and down from the peak of around +20 a year ago. That reflects declines across each of the subcomponents of trading, profitability, and employment over the past year. Meanwhile, the leading indicators for forward orders and capacity utilisation pointed to a further loss of momentum. Labour demand was anticipated to remain around average at +18,000 jobs per month, which if sustained implies the national unemployment rate is unlikely to decline over the next 6 months.

A downbeat tone was also evident in Westpac's consumer sentiment index in June, which softened by 0.6% to 100.7. The survey was conducted last week (3-7 June) and showed that pessimism towards the economic outlook over the next 12 months set in following the RBA's rate cut announcement and by the slowing in GDP growth in the Q1 National Accounts, with both events receiving widespread coverage in local news services. In spite of the rate cut and the tax relief measures in April's Budget, there appears to be a continued reluctance in consumers' attitudes towards spending; possibly due to a softening in labour market sentiment. For the housing market, the rate cut was assessed as a positive with the 'time to buy a dwelling' index lifting by a modest 1.8%. Of more significance, house price expectations surged by 22.7% in June reflecting the removal of uncertainty around tax policy following the federal election outcome.

— — —

Markets abroad this week continued to be driven by news headlines with the economic data flow light. The announcement by US President Trump last weekend that the proposed tariffs on Mexico would be halted were a tailwind for risk assets early in the week, though the optimism faded following threats from the US to impose sanctions relating to Germany and Russia's planned Nord Stream 2 gas pipeline project. Geopolitical tensions were also in focus on reports that US oil tankers had been attacked in the Gulf of Oman, while there were week-long protests in Hong Kong over extradition laws to mainland China.  

In a relatively quiet week for markets the highlight was the US inflation data for May, with the headline Consumer Price Index slowing from 2.0% to 1.8% in annual terms while the core measure eased from 2.1% to 2.0% over the year. This comes ahead of next week's Federal Reserve meeting where markets will be paying close attention to the Committee's view on inflation and whether the slowdown is still seen as 'transitory'. Markets are fully priced for a US rate cut by July and will be disappointed if the Committee does not at least give a clear signal that easier policy is being considered in the face of an uncertain growth outlook impacted by trade tensions.

Following on from last week's European Central Bank meeting, Governing Council members Coeure and Rehn reiterated the message that they are ready to act if necessitated by a deterioration in the economic outlook. In the UK, the ongoing impacts of Brexit continue to be felt with GDP growth contracting by 0.4% in April, which slowed annual output growth to 1.3% from 1.9% reflecting weakness in manufacturing and business investment. Notwithstanding, the labour market remains robust with the unemployment rate at 3.8% -- its equal lowest since 1975 -- while wages growth lifted by an annualised 3.1% pace for the 3-months to April. 

Wednesday, June 12, 2019

Australia's unemployment rate steady at 5.2% in May

Australia's unemployment rate remained at 5.2% in May, despite employment rising by more than 40,000 for the second consecutive month. The participation rate remains on the rise hitting a new record high in May.  

Labour Force Survey — May | By the numbers
  • Employment increased by a net 42,300 in seasonally adjusted terms -- easily outpacing the 16,000 increase expected by markets. April's initially reported increase of 28,400 was revised up strongly to 43,100.  
  • The national unemployment rate remained at 5.2%, in line with expectations. 
  • The underutilisation rate was unchanged at 13.7%, and the underemployment rate increased by 0.1ppt to 8.6%. 
  • The participation rate lifted by 0.1ppt to a record-high 66.0% (exp: 65.8%).
  • Aggregate hours worked fell by 0.3% in the month (prior rev -0.1%) to 1.77bn hours, though annual growth lifted from 1.5% to 2.1%.

Labour Force Survey — May | The details 

The national unemployment rate to two decimal places was 5.19% in May, little changed from April at 5.22%. Participation picked up by 0.11ppt from 65.9% to a new record high of 66.01%. In absolute terms, employment growth was strong at a net 42,300 in the month and outpaced the rise in participation of 39,900. As a result, the number of unemployed declined by 2,360. 

For the second consecutive month, strength in part-time work was evident. May's 42,300 net increase was driven largely by part-time work (+39,800) with a small contribution from full-time work (+2,400). Coming off a weak base (employment fell by a net 300 in May 2018) the pace of employment growth in annual terms accelerated from 2.54% to 2.88% -- its strongest since March 2018. Annual growth in full-time work is running at 3.12% -- a 13-month high -- while the pace in the part-time segment is 2.36% -- its fastest in 5 months. (click charts to expand) 

Somewhat strangely, despite record particpation and strong employment growth, hours worked declined for the second consecutive month easing by 0.3% in May following a 0.1% fall in April. However, growth through the year picked up to 2.1% from 1.5% driven by a base effect. Adjusting for the increase in employment, average hours worked per employee in the month fell by 0.7% to 137.9 hours and is also 0.7% lower across the year.   

Looking at the state-level data, there were mixed outcomes across the nation in May. New South Wales' unemployment rate was unchanged at 4.6%, while there were declines in Victoria (-0.2ppt) to 4.6%, South Australia (-0.4ppt) to 5.7% and Tasmania (-0.4ppt) to 6.4%. Unemployment rates increased in Queensland (+0.3ppt) to 6.2% and Western Australia (+0.2ppt) to 6.3%. The breakdown of employment growth for each state on a monthly, quarterly and annual basis is shown below.  

Labour Force Survey — May | Insights

The key takeaway is that while employment growth is strong so is growth in workforce participation. In that scenario it is difficult to make meaningful inroads into the spare capacity that the Reserve Bank of Australia (RBA) sees in the labour market. With the participation rate showing no sign of slowing the RBA will look to ease the cash rate further in order to speed up the pace of employment growth. Financial markets expect the next cash rate cut to come by around August.  

Preview: Labour Force Survey -- May

The ABS is due to release its Labour Force Survey for May at 11:30am (AEST) today. The previous survey confirmed a rise in the national unemployment rate to 5.2%, which led to last week's decision by the Reserve Bank of Australia (RBA) to cut the cash rate by 25 basis points to 1.25% in order "to support employment growth" and to shore-up its inflation outlook.   

As it stands Labour Force Survey 

In April, net employment increased by 28,400 in seasonally adjusted terms; well ahead of the median forecast for a rise of 15,000. The compositional detail showed full-time employment decreasing by 6,300 and part-time work rising by 34,700. Employment growth in annual terms increased from 2.44% to 2.58%.  

Despite strengthening employment growth, the unemployment rate lifted to 5.2% from an upwardly revised 5.1%. That was due to the participation rate increasing by 0.1ppt to a record-high 65.8%. The broader measures of excess capacity lifted for the second consecutive month; underemployment rate up by 0.3ppt to 8.5% and the underutilisation rate rising by 0.4ppt to 13.7%.

Aggregate hours worked lifted by 0.1% in April and by 1.9% over the year maintaining its upward trend reflecting strength in participation and employment growth. 

For a full review of April's report see here

Market expectations Labour Force Survey 

For today's report, the median forecast according to Bloomberg is for employment to rise by a net 16,000, though estimates range substantially from +1,000 to +50,000. The unemployment rate is forecast to ease from 5.2% to 5.1% around a wide range from 4.9% to 5.3%. The workforce participation rate is expected to hold at 65.8% in between a range from 65.7% to 65.9%. All in all, the median forecasts indicate today's report is expected to gain a 
pass mark. 

What to watch Labour Force Survey

Last week's RBA rate cut was to a large extent driven by a lack of progress being made in reducing excess capacity in the labour market. Most attention will centre around the unemployment rate as well as the underemployment and underutilisation rates. Achieving progress here will depend very much on the pace of employment growth given that the workforce participation rate is now at a record high. For now, the pace of employment growth is robust at 2.58% in annual terms to April, though the forward-looking indicators suggest that is likely to soften in the months ahead.

Friday, June 7, 2019

Macro (Re)view (7/6) | RBA cuts cash rate; Q1 GDP growth slows

Headlining the week domestically, the Reserve Bank of Australia (RBA) Board moved on its easing bias by cutting the official cash rate by 25 basis points (0.25%) to 1.25%. Governor Lowe outlined that the decision was taken in order to strengthen employment growth and, in turn, bolster confidence that inflation will gradually rise towards the 2-3% target range, rather than as a response to a deterioration in their economic outlook.    

The Bank's assessment is that Australia's level of 'full employment' is now consistent with an unemployment rate of around 4.5% -- a step lower than its historical estimate of around 5% and divergent from current conditions in the labour market following the rise in the unemployment rate from 5.1% to 5.2% in April. While the Bank retains a relatively constructive assessment on the labour market by highlighting strength in employment growth over the past year and gradually improving wages growth, an elevated level of excess capacity remains a restrictive influence. In acknowledgment, the Board resumed its easing cycle that commenced in November 2011, shown as our chart of the week (below), anticipating that a lower cash rate will help generate stronger labour market conditions and thereby shore-up its inflation outlook (see our full review here). 

Given the RBA's growth and inflation forecasts are based on the cash rate at 1.0%, at least one more rate cut can be expected in 2019, though financial markets are pricing in around 40 basis points of cuts. Importantly, Governor Lowe again reiterated the limitations of monetary policy in isolation and called for additional support from both the fiscal and structural sides.   

Chart of the week

The other major development locally this week was Q1's National Accounts, which showed that GDP growth was softer than expected in the quarter at 0.4% as annual growth slowed to 1.8% -- its lowest in 9½ years and around 1ppt below trend or potential growth of 2.75% (see our full review here). The key themes were; further slowing in household consumption growth reflecting persistent weakness in income growth and wealth impacts from falling property prices, an intensification of the downturn in the residential construction cycle, and subdued business investment.

Weakness in private sector demand remains in contrast with strong public demand, which is broadly based across consumption spending relating to the rollout of health and aged care initiatives, and investment in infrastructure projects in response to robust population growth. International trade was also supportive of growth in Q1 reversing a weak Q4 following supply disruptions in the resources sector. Also of significance is the tailwind from surging commodity prices that is bolstering national income growth and will provide the federal government with increased scope for fiscal stimulus in a slowing economy.  

There were a number of other data updates out this week for the month of April, including a decline in retail spending centred on discretionary consumption (see here), another highly elevated trade surplus driven by iron ore exports (covered here) and further weakness in housing finance approvals, though pre-dated by the federal election outcome and other supportive developments (reviewed here). Meanwhile, CoreLogic's Home Value Index showed that the national median price fell by 0.4% in May and by 7.3% over the year, though the pace of decline is slowing (see here).  

 — — —

Turning to offshore developments, central banks featured prominently this week with policymakers delivering assurances of support to nervous financial markets unsettled by the recent escalation in trade tensions. In the US, there has been a shift in the tone of the rhetoric from the Federal Reserve away from their recent "patient" narrative given the uncertainties to the growth outlook posed by trade tensions. Notably, in a speech Fed Chair Powell highlighted that given the prevailing risks, the Committee stands ready to "act as appropriate to sustain the (economic) expansion". Similar sentiments were expressed by Fed Vice Chair Clarida last week that pointed to the Committee being responsive to persistently low inflation or to a deterioration in economic conditions. Friday's soft US employment report where non-farm payrolls lifted by 75,000 in May -- well short of the 175,000 expected -- only intensified expectations in financial markets for a near-term rate cut.    

Over in Europe, the European Central Bank conducted its latest policy, where due to the "prolonged presence of uncertainties" associated with trade tensions, geopolitical developments, and emerging market vulnerabilities the Governing Council is "determined to act" to support the economy -- including potentially restarting its asset purchase programme.  

The Bank's outlook for GDP growth was revised up to 1.2% in 2019 (+0.1ppt), though there were downgrades for 2020 to 1.4% (-0.2ppt) and 2021 to 1.4% (-0.1ppt). Similarly, inflation is forecast to reach 1.3% in 2019 (+0.1ppt) but lowers to 1.4% in 2020 (-0.1ppt) before rising to 1.6% in 2021 (unchanged). With the risks described by ECB President Draghi as "tilted to the downside", the Bank's forward guidance for an interest rate increase was pushed back by 6 months to at least the end of the first half of 2020. 

Also announced were pricing details of the ECB's upcoming TLTRO-III series (a form of funding to the banking sector). Though within expectations, markets were left somewhat underwhelmed given this iteration will be priced slightly less favourably than the version it will replace. Adding to the disappointment, it appears that plans for 'tiering' the negative deposit rate charged on banks' excess reserves have been shelved for the time being. 


Thursday, June 6, 2019

Australian housing finance approvals down further in April

Australian housing finance approvals to owner-occupiers slid further in April, though the total value of lending to the segment lifted in the month, as investment lending showed further weakness. However, these data pre-date several significant developments including the federal election outcome, the proposal by banking regulator APRA to ease loan serviceability criteria and the Reserve Bank of Australia's rate cut at the June Board meeting. 

Housing Finance — April | By the numbers
  • Housing finance approvals to owner-occupiers (excluding refinancing) fell by 1.1% in April to 30,833 -- the market forecast was for a decline of 0.3% (prior rev: -2.6% from -2.8%). The annual pace of decline was little changed at -13.5% from -13.6%. 
  • The total value of housing finance commitments (excluding refinancing) was relatively steady at +0.2% in April to $A17.0bnbn (prior rev: -2.9% from -3.2%), which at that level are down by 17.3% over the year (prior rev -18.0% from -18.4%). 

Housing Finance — April | The details 

Across the segments in nominal terms for April, lending to owner-occupiers excluding refinancing increased by 1.0% to $12.6bn (-13.8%Y/Y) and commitments to investors excluding refinancing fell by 2.2% to $4.4bn (-26.0%Y/Y). Refinancing saw a 0.6% fall to $8.3bn (-10.2%Y/Y), with declines from owner-occupiers (-0.7%m/m, -8.3%Y/Y) and investors (-0.3%m/m, -14.4%Y/Y). Lending to owner-occupiers for alterations to existing properties eased by 0.4% to $275m in the month to be down by 11.6% through the year. 

Loan approvals to owner-occupiers (by number) fell by 1.1% in the month and are down by 13.5% for the year. Approvals to purchase established properties fell by 0.6% in April to 23,457 (-13.8%Y/Y). Construction-related approvals to owner-occupiers were down by 2.8% in April to 7,376 (-12.7%Y/Y). That resulted reflected weakness for loan approvals to fund construction, which fell by 5.2% to 5,266 (-6.0%Y/Y). Approvals for newly constructed dwellings lifted by 3.7% to 2,110 but remain well down over the year at -25.9%Y/Y. The ABS does not produce approval estimates for investors. 

The state-by-state details are summarised in the table, below, across segments and buyer type. 

The chart, below, tracks owner-occupier approvals (excluding refinancing) on a state-by-state and national basis. 

Lastly, the next chart shows the value of lending commitments excluding refinancing for investors across the states. 

Housing Finance — April | Insights 

There was continued weakness for housing finance in April, however these data pre-date recent developments that should be supportive, which include the federal election outcome, APRA's proposal to easing serviceability assessments, the RBA rate (with the prospect of more to follow), slowing price declines according to CoreLogic's latest data and improved signals from auction clearances. To what extent these factors will impact housing finance demand we will only know in a few months' time.       

In review: Australian Q1 GDP growth slows to 1.8%

Momentum in the Australian economy continued to ease in 2019 following a sharp slowdown over the second half of 2018. The key dynamics include further weakness in household consumption due to persistently slow income growth, negative wealth impacts from falling property prices and tight credit conditions, a downturn in the residential construction cycle and subdued business investment. Slower global growth prompted by continuing trade tensions is the key headwind from abroad. 

In seasonally adjusted terms, real GDP growth increased by 0.4% in Q1, which was slightly below the median forecast for +0.5%, while the annual pace came in as expected at 1.8% -- its lowest in 9½ years -- after slowing from an upwardly revised rate of 2.4% for the year to Q4. Output growth has slowed to around 1ppt below Australia's trend or potential pace of around 2.75%. 

The Reserve Bank of Australia forecasts annual GDP growth to ease to 1.7% by mid-2019 before picking up over the second half to 2.6% by year's end. The RBA Board lowered the official cash rate by 25 basis points to 1.25% at its June meeting, with financial markets pricing in around another 40 basis points of easing by end 2019. 

— — 

GDP — Q1 | Expenditure: GDP (E) +0.2%q/q, +2.1%Y/Y

Household consumption (+0.3%q/q, +1.8%Y/Y) — Growth in household consumption slowed further in the first quarter of 2019 as the annual pace softened from 2.0% to a near 6-year low at 1.8%.  The 4-quarter growth profile was 0.8% (Q2 '18), 0.3% (Q3 '18), 0.4% (Q4 '18) and 0.3% (Q1 '19) indicating that the softness set in over the second half of last year and continued into 2019. (click charts to expand)

Weakness in discretionary spending intensified falling by 0.1% in Q1 easing annual growth to 1.0% from 1.2%. In particular, that was weighed by retail spending on clothing and footwear (-0.6%q/q), furnishings and household equipment (-0.4%q/q), recreation (-0.5%q/q) and cafes and restaurants (-0.4%). In contrast, non-discretionary spending increased by 0.5% over Q1, though annual growth eased to 2.3% from 2.5%. In Q1, that included rises in utilities (1.7%), health (0.7%), rents (0.6%) and education (0.3%).   

The weakness in discretionary spending is driven by persistently slow income growth. Real growth in household disposable income lifted by 0.5% in Q1 and followed a 0.6% gain in Q4. Though subdued, these outcomes are an improvement on recent quarters. As a result, base effects saw annual growth in disposable income lift from 0.4% to 0.8%. The household saving ratio increased for the second consecutive quarter, rising by 0.2ppt to 2.8%. Given weak income growth and the negative wealth impact from falling property prices, households have cut back on discretionary spending, in turn resulting in a slight lift in saving.

Dwelling investment (-2.5%q/q, -3.1%Y/Y)  The residential construction cycle began to turn down in Q3 2018, with further weakness occurring in 2019 as activity contracted by 2.5% in the quarter. The annual pace has swung from +3.5% in Q4 to -3.1% in Q1. Both new building (-1.8%q/q, -3.1%Y/Y) and alterations (-3.8%q/q, -3.0%Y/Y) are firmly in decline. With dwelling approvals deteriorating for much of the past year, residential construction activity can be expected to remain a drag on output.     

Business investment (+0.5%q/q, -1.3%Y/Y) — Underlying business investment lifted modestly in Q1 but is softer through the year. The detail for the quarter was mixed; non-dwelling construction rising by 1.3% (building +4.5% and engineering -1.5%), intellectual property up by 1.0%, while equipment investment fell by 0.3%. The declines from engineering and equipment likely reflect residual weakness from the resources sector as major projects near completion. The recent ABS Capital Expenditure survey pointed to investment from both the non-mining and mining sectors lifting in 2019/20 and adding to economic activity.    

Public demand (+0.8%q/q, +5.5%Y/Y) — Activity continues to be supported by a strong public sector. Consumption spending is driven by the rollout of the NDIS and other initiatives relating to health and aged care services. Meanwhile, investment is firmly on the rise driven by an elevated pipeline of infrastructure projects.    

Net exports  (+0.2ppt in Q4, +0.5ppt yr) — Net trade added 0.2ppt to growth in Q1, which reversed subtraction in Q4 of 0.2ppt. Export volumes lifted by 1.0% in the quarter after improving from a 0.5% decline in Q4, with growth over the year subdued at 1.7% in response to supply disruptions in the resources sector. Import volumes contracted by 0.1% in Q1 and by 0.5% over the year in line with soft domestic demand. Meanwhile, inventories were a surprise drag in Q1 (-0.1ppt) but were flat through the year. 

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GDP — Q1 | Incomes: GDP (I) +0.5%q/q, +1.5%Y/Y

Q1's estimate of real GDP income growth was 0.5%, in line with the production estimate and stronger than the expenditure outcome (+0.2%). The annual pace softened to 1.5% from 1.8% driven by a base effect. 

Australian nominal GDP growth posted a 1.4% rise in Q1 -- the strongest outcome in a year --however, a base effect saw the annual pace ease from 5.5% to 4.9%. At its current 4.9% pace, national income growth has risen by 1.1ppts above its recent low from Q4 2017 (3.8%). Rising commodity prices are a strong tailwind, with the nation's terms of trade rising by another 3.1% in March quarter following a 3.0% lift in Q4. Growth through the year has swung to +6.1% compared to a 3.1% drag from a year earlier. 

This has had a direct flow through to the corporate sector and notably so for mining companies. Private sector company profits (excluding financial corporations) increased by 3.9% in Q1 after a 3.7% lift in Q4. In year-on-year terms, profit growth moderated from 11.5% to 11.0% but has accelerated from a 2.8% pace in Q1 2018. Profitability in the financial sector continues to grow at a more modest but still solid rate, rising by 1.9% in the quarter to 7.2% through the year.

The Compensation of Employees measure (including wages and salaries) saw a 1.2% elevation over Q1, which firmed annual growth from 4.1% to 4.3%, though that is well down from the recent peak of 5.1% from a year earlier. The increase in Q1 can be explained by a strong lift in hours worked, which the Bureau reported increased by 1.0% over the quarter that drove an acceleration in the annual pace from 1.6% to 2.8%. 

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GDP — Q1 | Production: GDP (P) +0.5%q/q, +1.8%Y/Y

The production estimate for GDP was 0.5% in Q1 matching with the income estimate and above the expenditure outcome (+0.2%). The annual pace slowed further from 2.2% to 1.8% to its lowest since Q4 2009.   

Four industries dragged on output in Q1; agriculture (-0.2%), construction (-0.9%), accommodation and food services (-0.2%) and real estate services (-0.4%). The impact of drought conditions has severely impacted output in the agriculture sector over the past year. Construction output has also contracted noticeably across the year following three consecutive quarterly declines due to the residential cycle turning down. 

At the other end of the scale, the health sector remains well clear at the top of the ladder driven by public spending associated with the NDIS and aged care initiatives, while consumer demand remains robust. Separate ABS data shows that employment growth continues in the sector, though now at a more moderate rate after a sharp run-up in 2017 and 2018. The chart, below, shows the industry-by-industry breakdown.

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GDP — Q1 | Prices

As measured by the GDP deflator, economy-wide inflation posted a 1% rise in Q1 to match the outcome from Q4. The annual pace was little changed at 3.0% from 3.1%, though sharply higher than a year earlier at 0.7%. The predominant factor here is the rise in the terms of trade. Abstracting for that impact, the Gross National Expenditure deflator shows that pricing pressures continue to be subdued at just 0.3% in the quarter and 1.6% over the year.

The headline Consumer Price Index (CPI) stalled in Q1 (0.0%) with the annual pace slowing sharply from 1.8% to 1.3%. The closest proxy in the National Accounts is the Household Consumption Deflator, which showed a 0.3% lift in Q1 while annual growth saw a more modest slowing compared to the CPI, easing from 1.7% to 1.5%. The Household Consumption Deflator is based on dynamic consumer spending rather than the fixed basket methodology in the CPI. 

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GDP — Q1 | Productivity

National productivity growth fell away to an 8-year low in Q1. Growth in total hours worked at 1.1% in the quarter vastly exceeded output growth of 0.4%, which resulted in real GDP per hour worked falling by 0.5%, sending the annual pace to -1.0% from +0.8%. GDP per hour worked in the market sector (excludes the public sector) fell for the third consecutive quarter contracting by -0.4%, as the annual pace turned negative at -0.9% from +0.7%. Real GDP growth on a per capita basis fell by 0.03% in Q1 -- its third straight quarterly contraction -- with the annual pace sliding from 0.7% to 0.1% marking its lowest since Q2 2013.

On the costs front, nominal non-farm unit labour costs were flat in Q1, though the annual pace lifted from 1.2% to 1.6% reflecting a base effect as the outcome from Q1 2018 (-0.4%) fell out of the calculation. Costs remain well down from the recent peak of 2.4% in year-on-year terms to Q4 2017. Adjusting for inflation, real non-farm units labour costs continue to fall with a sizeable 1.1% decline Q1 to be 1.7% lower through the year, however that was an improvement on the 2.3% deterioration for the year to Q4. With labour costs in real terms continuing to slide, this will constrain the nation's inflationary pulse and indicates that excess capacity in the labour market remains elevated.  

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GDP — Q1 | States

Demand in New South Wales lifted by 0.4% in Q1 recovering from a 0.1% contraction in Q4, though growth in annual terms continues to ease and is now 2.1% -- its slowest in 6½ years. Conditions in the household sector are subdued with consumption growth sliding to an annual pace of 1.8% from 2.5% a year ago, which is a response not only to low income growth but also to sharp declines in property prices. The state is noticing the impact of the rollover in the residential construction cycle with activity across building and alterations down by a combined 7.8% through the year. In offset, business investment is solid at 4.6% over the year bolstered by non-residential construction. There is also considerable support from public demand.   

In Victoria, demand increased by a modest 0.2% in the quarter slowing the annual pace from 5.4% to 3.0% -- a 5½-year low. Household consumption growth slowed further to 2.6% in annual terms to be down by a full percentage point from Q1 2018. Similar dynamics are in play as in New South Wales around wealth effects from falling property prices, though to a lesser extent so far. This is evident in residential construction activity, which while weakening at a sharp rate is still modestly higher over the year at 0.9%. Business investment was robust rising by 6.0% over the year driven by non-residential construction and equipment spending. Public demand remains solid and will continue to drive activity in the state given its strong pipeline of projects.

Looking at the other states, demand in Queensland remains contained at 0.5% in Q1 and 1.4% for the year. A weak household sector is evident, while business investment continues to fall. Public investment has been lifting providing some offset. In South Australia, demand contracted by 0.2% in the quarter slowing the annual pace to 1.8% -- its softest in nearly 3 years. This reflects slowing household consumption and declining residential construction activity. It was another tough quarter in Western Australia with demand falling by 0.3% taking annual growth to -1.4%, albeit rising from -1.9%. The state is under pressure from declining business investment, mostly from the mining sector but also from weakness in residential construction. Tasmania posted the strongest lift in demand of all states in Q1 at 0.7%, though the annual pace moderated to 5.0% from 6.5%. The household sector was weak in the quarter (-0.3%), but that was overcome by strength from business investment and public demand.