Australian economy expands 0.9% in Q2

The Australian economy expanded by 0.9% in the June quarter, meeting market expectations. A resilient household sector defied headwinds that included a third consecutive quarter of falling real incomes, rising inflation and the start of the RBA rate hiking cycle, lifting consumption by 2.2%q/q to drive economic growth in the quarter. Real GDP increased by 3.6% through the year and was now 5.5% higher than pre-Covid levels. 

Momentum was sustained in household consumption as the full reopening of the international border supported services spending. Inbound tourism, as well as a rebound in resources and rural goods production from weather-related disruptions earlier in the year, led to a sizeable contribution to growth from net exports. Business investment contributed modestly to growth (0.1ppt), with equipment spending finding strong momentum over the first half of the year (7.2%) on the easing of supply chain pressures.   

Weighing most heavily growth was inventories (-1.2ppts) following a strong period of rebuilding over the past couple of quarters. Dwelling investment was also a headwind (-0.1ppt) as supply constraints in the availability of materials and labour and La Nina held back progress in working through what is a very substantial pipeline. 

The main theme in the economy in the June quarter was the resilience of consumers as household consumption lifted by 2.2%. Although high inflation caused real disposable incomes to fall for the third quarter in sucession and the RBA lifted the cash rate by 75bps over May and June, demand still advanced. These forces saw households reduce their rate of saving from 11.1% to 8.7% over the quarter, but that is still well above long-run averages. Accumulated savings over the first year of the pandemic (in the order of $250bn) and a strong labour market continue to support household spending. 

The easing of Covid restrictions and the reopening of the international border continues to see consumption patterns rotating back to services categroies (3.6%q/q) from goods (-0.1%q/q). Transport services rose 37.3%q/q on the wider resumption of travel, generating an associated boost for hotels, cafes and restaurants (8.8%q/q), while recreation and culture services remained robust (3.6%q/q). Going against the broader weakness for goods-related demand is clothing and footwear (3.7%q/q), consistent with more Australians getting out and about.  

The other main highlight in Q2's national accounts was the surge in national income from elevated commodity prices. Nominal GDP lifted by 4.3% in the quarter and by 12.1% over the year, boosted by a terms of trade that has accelertaed to a record high level. The rise in nominal GDP compares to much smaller rises in output (3.6%) and hours worked (2%) over the past year. 

See the in-depth review here

RBA hikes rates by 50bps in September

The RBA Board hiked its key interest rates by 50bps at today's September meeting, raising the cash rate target to 2.35% and the rate on Exchange Settlement balances to 2.25%. Rates have now been hiked by 225bps since May, a pace of tightening exceeded only once since the introduction of inflation targeting in Australia, by the hiking cycle back in 1994 (275bps in 5 months). The RBA still has work in front of it with the Board expecting further rate hikes will be necessary "over the months ahead", though a downshift in the pace of hikes to 25bps increments could be on the table in October.  

Rate hikes throughout this ongoing tightening cycle have been framed in terms of normalising monetary policy, after the cash rate was lowered to 0.1% in 2020 in response to the pandemic crisis. Following May's initial 25bps hike, the 4 consecutive hikes of 50bps that have followed have frontloaded the withdrawal of this support. 

Today's decision statement from Governor Philip Lowe removed any reference to normalisation, suggesting the Board may now consider rates to be around neutral territory, a level for the cash rate no longer stimulatory for growth and inflation. We know from the July meeting that the Board is using the neutral rate framework as a guidepost to setting monetary policy and Governor Lowe's speech in late July told us that most estimates for the nominal neutral rate in Australia were "at least 2½% per cent".

If the above interpretation is close to the mark — more should be known on Thursday given Governor Lowe is delivering a speech titled 'Inflation and the Monetary Policy Framework' — then it suggests the Board may be open to a discussion to dialing down the pace of tightening to hiking in 25bps increments from October, consistent with market pricing. Repeated in today's statement was the line that rates are "not on a pre-set path" and that the Board was aiming to keep the economy "on an even keel" as it tightens policy to return inflation to the 2-3% target band. 

The reaction function continues to centre on inflation expectations. Although inflation is forecast to slow over 2023 and 2024, the outlook is seen as fairly fragile in the sense that there had been signs wage pressures were building and the strength of the labour market meant they were likely to keep rising. Governor Lowe noted the Board will be alert to signs of second-round effects of high inflation coming through in price and wage-setting processes.

Australia Current Account $18.3bn in Q2; net exports +1ppt

Australia's current account surplus widened sharply to $18.3bn in Q2 as elevated commodity prices delivered record highs for the quarterly trade surplus and the terms of trade. Net exports are forecast to add 1ppt to quarterly GDP in tomorrow's national accounts. 

Balance of Payments  — Q2 | By the numbers

• Australia's current account surplus widened by $15.6bn in the quarter to come in at $18.3bn (vs $22bn expected). The surplus in Q1 was downwardly revised to $2.8bn from $7.5bn. 

• The quarterly trade surplus surged higher rising by $16.3bn to print at a record high of $43.1bn. Export earnings accelerated by 14.7%q/q, far outpacing a 4.6%q/q rise in import spending.  
• The income deficit was $0.7bn wider on the quarter coming in at $24bn. 
• ABS reports that net exports will add 1.0ppts Q2 GDP growth. 

Balance of Payments — Q2 | The details 

Australia's current account has been in surplus since the June quarter of 2019, the longest run of surpluses on record confirmed after today's outcome for Q2 ($18.3bn). This was substantially wider than Q1's surplus ($2.8bn). 

The driving factor was the rewidening of the trade balance. For the past couple of quarters, the trade surplus has narrowed because spending on imports has risen faster than earnings generated by Australian exports, reflecting both strong domestic demand and rising inflation. In the June quarter, export earnings lifted by 14.7% to $172.3bn while import spending was 4.6% higher at $129.2bn. That led to the trade surplus widening to $43.1bn in Q2, a record high. Elevated commodity prices on the back of the Ukraine war and other supply disruptions drove the surge in export earnings.  

Accordingly, Australia's terms of trade (ratio of export prices to import prices) has reached a new record high. As a commodity exporter, Australian national income has been boosted by the surge in prices; this is the opposite scenario currently faced by the European and UK economies, which as energy importers have seen their terms of trade collapse, resulting in large capital outflows and weaker currencies.  

In volume terms (adjusting for price movements), export volumes posted a 5.5% rise in Q2 while imports were little more than flat (0.7%). As a result, the ABS reported net exports are expected to add 1ppt to Q2 GDP growth. 

The major drivers of export volumes were a rebounded in resources exports (4.1%), after weather-related disruptions led to a fall in shipments in Q1 (-2%), and services (13.7%) as the recovery in the sector picked up following the full reopening of the international border. 

The main theme playing out in imports is the divergence between goods (-1.6%q/q) and services categories (14.3%q/q). Demand patterns are rotating back to services from goods with Covid restrictions now removed. Overseas travel is recovering strongly (up 38.6%q/q) but is still more than 60% below pre-Covid levels. For comparison, inbound travel is down by a similar amount. 

Balance of Payments — Q2 | Insights 

An easing in weather-related disruptions saw resources exports rebound, supporting economic activity in Q2. The services sector is recovering strongly following the reopening of the international border, driving a rotation in demand from goods-related consumption. Elevated commodity prices are generating a very significant tailwind for national income.  

---

Also today, the ABS published quarterly statistics for public demand. The main features were a 0.8% fall in government expenditure, after spending was boosted by flood recovery assistance in Q1, while underlying investment lifted by 3.4%. Overall, the ABS estimate public demand will add 0.1ppt to Q2 GDP.

Preview: RBA September meeting

The RBA Board is likely to hike its key rates by 50bps for the fourth meeting in succession today, taking another step towards normalising policy settings. Governor Philip Lowe's decision statement (due 2:30PM AEST) should confirm a rise in the cash rate target to 2.35% and to 2.25% for the Exchange Settlement rate. 

It has been a quiet inter-meeting period in terms of public appearances by RBA officials with just one speech taking place since the August 2 meeting. That was delivered by the Head of Domestic Markets Jonathan Kearns on the risks posed to the financial system from climate change. Therefore, going into today's meeting, markets have been left to reflect on the central message from the August meeting: that further rate hikes are needed to rebalance supply and demand in the economy and put downward pressure on inflation. Recall that last month, the Bank updated its economic projections, lifting its forecast for peak inflation to 7¾% in Q4.  

In his most recent speech in late July, Governor Lowe said the Board was using the neutral rate framework as a guidepost for setting policy. Most approaches studied by the RBA suggest the current setting of the cash rate at 1.85% is still some way below estimates of the neutral rate, indicating policy is still boosting growth and inflation. In that context, another 50bps hike looks assured today, consistent with the messaging around "normalising" policy. 

The market will be focused on prospects for October and beyond, with a dialing down in the pace of hikes to 25bps increments seen as coming under consideration from next month. In his decision statement in August, Governor Lowe noted rates were "not on a pre-set path" and also that the Board would look to keep the economy "on an even keel" as it continues to tighten policy. That strikes a more balanced message than recent commentary by officials from the Fed and ECB that has clearly indicated a willingness to keep hiking rates to lower inflation despite risking weaker economic growth. 

In addition to today's meeting, Governor Lowe is scheduled to deliver a speech on Thursday titled Inflation and the Monetary Policy Framework (1:05PM AEST).     

Australian retail sales rise 1.3% in July

Australian retail sales saw their strongest rise in 4 months posting a 1.3% increase in July. Despite headwinds to consumer demand from high inflation, RBA rate hikes and weak sentiment retail sales continue to remain resilient with notable strength in discretionary spending.      

Retail Sales — July | By the numbers 

• National retail sales increased by 1.3% in July, in line with the preliminary estimate that printed well above expectations (0.3%) last week. 
• 12-month retail sales accelerated to 16.5% from 12.5%, driven by July's strong outcome and base effects.

Retail Sales — July | The details  

Month-on-month retail sales have been on a slowing trend since March but lifted sharply by 1.3% in July. A rotation in spending patterns back to services categories from goods following the easing Covid restrictions has largely been behind this slowdown. July's strong result, though inclusive of inflation, indicates household demand remains robust despite weak sentiment in the face of cost-of-living pressures and RBA rate hikes. In particular, discretionary spending (retail sales ex-food) continues to remain strong. 

In July, food sales lifted by 1.2% as spending at supermarkets (1.4%) and specialised stores (2.5%) picked up, likely driven by rising prices. Categories supported by travel and the reopening of the services sector continue to show sustained strength with restrictions removed, with gains of 3.3%m/m in clothing and footwear and 1.8%m/m in restaurants and cafes, while department stores saw a 3.8% rise.

Strong gains in the month came through in New South Wales (1.3%) and Victoria (1.8%) to drive growth in national turnover. But the strength also extended to Western Australia (1.6%) and South Australia (1.2%). Queensland saw a more modest increase (0.4%), though sales in the state are second only to Western Australia on a pre-Covid comparison. 

Retail Sales — July | Insights

July's resilience in retail sales looks to have continued through August, based on high-frequency card data compiled by Westpac. An easing in fuel prices from their peaks may be a contributing factor. More broadly, the strength of the labour market with the unemployment rate down at 50-year lows and accumulated savings appear to be continuing to support consumer spending.  

Source: Westpac Economics 

Australian Business Indicators Q2: Inventories 0.3%

Inventory rebuilding by Australian firms slowed in the June quarter as demand conditions remained robust. Company profits surged to new record highs, though the divergence in profits between the mining and non-mining sectors has widened. A strong labour market and fewer disruptions to activity led to the largest quarterly jump in the wages bill in 14 years. 

Business Indicators — Q2 | By the numbers 

• Inventories lifted by 0.3% in the June quarter to $179.2bn, lower than the 1.5% increase expected and down from Q1's 3.6% rise. 
• Company gross operating profits lifted by a further 7.6%q/q (vs 4.5% expected) to $150.6bn to be up by 28.5% through the year. 
• Wages and salaries advanced by 3.3% to $163.9bn, a 6.8% rise over the year. 
• Sales increased by 1.1% in the June quarter, matching the rise seen in Q1; volumes have expanded by 2.6% over the year.

Business Indicators — Q2 | The details

Demand conditions held up over the June quarter despite headwinds from cost-of-living pressures, RBA rate hikes and disruptions from Covid and La Nina. Sales volumes lifted by 1.1% in the quarter and by 0.9% if the mining sector is excluded. Accommodation and food services surged by 10.7%q/q and the transport industry lifted by 5.5%, with both benefitting from the reopening of the international border and pent-up demand domestically. Rises in arts and recreation (5%q/q), other services (1.8%q/q) and retail (0.4%) reflects the broad-based nature of demand.  

Sales strongly outpaced inventories (0.3%q/q) following a strong rebuild in the March quarter (3.6%q/q). That dynamic points to a negative contribution to Q2 GDP growth from inventories, potentially unwinding Q1's contribution (+1ppt). Overall, relative to their respective pre-Covid levels, inventories are around 2% higher compared to around 4% for sales. Inventories have been held back by supply constraints while the demand side has been boosted by reopenings and large-scale stimulus. 

Gross company profits rose to new record highs, surpassing $150bn in the quarter. Adjusting for changes in inventory valuations, company profits lifted by 8.6%q/q to $141.3bn. Surging prices across the commodities complex following the war in Ukraine and other supply-related issues have seen mining sector profits accelerate by 43% over the first half of 2022 to $81bn. In contrast, profits in the non-mining sector declined slightly lower over the first half (-1.9%); although demand has been robust, margins have come under pressure from rising input costs.    

Spending on wages and salaries saw its sharpest quarterly rise since Q2 2008, up by 3.3% and 6.8% higher over the year. Recall that in the March quarter hours worked in the economy contracted by 0.9% due to the disruptions from Covid and flooding on the east coast. Fewer disruptions in Q2 boosted hours worked, and employment continued to increase, both factors boosting wages. Also, in a tightening labour market many Australians would have been working more hours at overtime rates.       

Business Indicators — Q2 | Insights

Inventories are set to weigh notably on quarterly activity, though a solid rise in Q2 GDP of around 1% is still expected. Today's report reflected the resilience of demand conditions in the Australian economy, boosted by the full reopening of the tourism sector. Surging commodity prices are supporting national income and will drive higher government tax revenues, though margin pressures are evident in the non-mining sector. A strong labour market and a rebound in hours worked saw the wages bill accelerate in the June quarter.   

Macro (Re)view (2/9) | Following through

Markets continued to adjust to the key message from last week's Jackson Hole symposium: that higher rates for longer are likely to be needed to return inflation to target. Accordingly, next week is likely to see the ECB and BoC each hiking rates by 75bps and the RBA by another 50bps on Tuesday. A well-rounded non-farm payrolls report out of the US has given markets optimism that some of the supply constraints in the labour market are easing, which is key to reducing wage-price pressures. 

US labour market remains strong and participation lifted 

August's non-farm payrolls report was well received by markets with the key takeaway being that labour market imbalances showed signs of easing. Employment on non-farm payrolls lifted by 315k in the month, slightly stronger than expected (298k) while net revisions lowered payrolls over June and July by 107k. The US economy continues to generate a strong pace of employment growth, and a rise of around 200k in job openings in July to 11.2 million indicates labour demand is likely to remain robust for some time. 

While the unemployment rate unexpectedly ticked up from 3.5% to 3.7% (vs 3.5% expected), this was mainly driven by a rise in labour force participation, lifting from 62.1% to 62.4%. The pandemic led to a lot of early retirements in the US and so it is more instructive to look at prime age participation (25-54yrs): this jumped from 82.4% to 82.8%, its highest level since February 2020. Increased labour supply helped to keep wage pressures from pushing higher as growth in average hourly earnings held steady at 5.2%yr.

On the back of CPI inflation flatlining on a month-on-month basis in July, the detail in August's labour market report potentially makes the Fed's decision to hike rates later this month a close call between 50bps and 75bps. However, the resolve of the Fed to lower inflation was made clear last week at Jackson Hole and the ultimate destination for rates likely remains unchanged. Cleveland Fed President Mester this week said a raise and hold strategy in the fed funds rate to "somewhat above" 4% by early next year was needed to return inflation to target. 

Supply constraints weighed on the Australian economy in Q2...

Updates were received on construction activity and business investment for Q2 ahead of next week's June quarter national accounts. Notwithstanding, real GDP is expected to have increased strongly by 1.2% in the quarter supported by household demand that has remained resilient to high inflation, falling real incomes and rate hikes (preview available here). Further signs of that resilience came through in July retail sales, up by a stronger-than-expected 1.3% in the month.   

Construction work done contracted by a sharp 3.8% in the June quarter as capacity constraints associated with materials and labour shortages held back activity (reviewed here). These pressures have been acute in the residential sector, causing the volume of work done in the quarter to decline significantly by almost 7%. A very substantial residential pipeline, including more than 100k homes under construction, is contributing to supply constraints and timeframes are being pushed out as a result. Approvals for detached homes continue to hold up, however, and are at levels similar to pre-pandemic peaks, rising by 1%m/m in July. The preference shift away from higher-density living and a desire for more space — themes that emerged during the pandemic — continues to play out. Unit approvals fell to their lowest monthly level in more than a decade, driving a 17.2% fall in headline dwelling approvals in July (reviewed here). 

Private sector capital expenditure declined by 0.3%q/q, defying expectations for a 1% rise (reviewed here). Although business investment on equipment and machinery saw a solid rise (2.1%q/q) this was offset by weakness in buildings and structures (-2.5%q/q), the latter reflecting construction capacity pressures. Capex stalled over the first half of the year and will need to regain momentum if supply constraints are to be resolved. Forward-looking investment plans for 2022/23 were upbeat in that respect as estimate 3 came in at $146.4bn, an 11.7% upgrade on estimate 2 put forward by firms 3 months ago.  

... and housing market conditions continue to cool 

Activity in the housing market is slowing as the effects of affordability concerns and the RBA's rate hiking cycle are starting to take hold. An 8.5% fall in housing finance commitments in July (reviewed here), its sharpest decline since the start of the pandemic, and the acceleration in housing price declines to 1.6%m/m nationally in August according to CoreLogic are clear indicators of softening demand. As is a slowing pace of credit growth, with July's aggregate for housing credit seeing its slowest month-on-month rise (0.5%) since early 2021. 

Euro area inflation rises through 9%; ECB set to hike rates by 75bps 

August's preliminary estimates reported headline inflation in the euro area lifted from 8.9% to 9.1%yr, and the core rate pushed up to 4.3%yr from 4%; both outturns were stronger than expected and at record highs since the inception of the single currency. These outcomes added weight to the calls from hawkish end of the ECB's Governing Council for a 75bps rate hike to be on the table at next week's meeting, which is now the consensus view in markets. 

ECB Executive Board member Isabel Schnabel delivered a key speech at the Jackson Hole symposium arguing the case for the Governing Council to act forcefully in response to high inflation, despite risking weaker growth and higher unemployment. Schnabel outlined a more frontloaded approach to tightening was appropriate to avoid the risk of high inflation becoming more persistent, as well as to shore up the ECB's credibility with respect to its inflation mandate and in recognition that a slower approach now risked requiring tighter monetary policy for longer down the track. 

Although not precluding a 75bps rate hike next week, a speech from ECB Chief Economist Philip Lane had a more cautious tone. Lane said the ECB was taking a "meeting-by-meeting" approach, continually reassessing the gap between the current policy rate and the expected terminal rate needed to be reached to lower inflation to target. Lane argued that gap should be closed at a "steady pace" through a "mutli-step calibrated series" of hikes rather than "a smaller number of larger rate increses". Uncertainty around the transmission of policy tightening on financing conditions and the flexibility to make "mid-course corrections" were key factors for Lane's thesis.  

Preview: Australian Q2 GDP

Australia's national accounts for the June quarter are due to be published by the ABS at 11:30am (AEST) today. A tightening labour market, rising inflation and the RBA commencing its rate hiking cycle were the main themes in the Australian economy in the June quarter. Consumer demand remained robust throughout and is expected to have driven a 0.9% quarter-on-quarter expansion in real GDP.  

Conditions in the labour market strengthened considerably over the June quarter. Employment expanded by over 150k, lowering the unemployment rate to new half-century lows at 3.5%. Despite ongoing disruptions caused by elevated staff absences due to rising Covid cases and caregiving reasons, hours worked still lifted by more than 4% in the quarter. As a result, underemployment fell sharply to lows last seen in 2008 and labour force underutilisation was reduced to a 40-year low. This came alongside a rise in labour force participation to record highs. 

 

Wages growth had continued to rise in response to the strength of the labour market, though increases in base wages were still contained running only a little above their pre-pandemic pace at 2.6% in year-ended terms. 

Inflation pressures increased over the first half of the year driven by rising prices for fuel, new dwellings and groceries. The war in Ukraine had led to elevated prices across the global commodities complex, pushing up prices for oil and inputs required in food production. The flooding in New South Wales and Queensland had also disrupted supply chains for local producers, leading to higher prices for fruit and vegetables. Ongoing shortages in materials and labour were driving up home building costs. 

With inflation running well ahead of wages growth, real household income continued to fall, causing consumer sentiment measures to weaken to very low levels. The RBA also started hiking interest rates in May with a 25bps increase before stepping up to a 50bps rise in June. Household demand remained resilient to these headwinds with the strong labour market and accumulated savings continuing to support spending. Despite another strong rise in retail prices (1.7% in Q2), retail volumes posted a larger increase than in Q1, rising by 1.4% in the June quarter. Discretionary categories were particularly strong rising by 2.8% on the back of strength in dining out (8.6%) and clothing and footwear (3.9%), with these gains reflecting the wider reopening of the services sector and eased travel restrictions.   

Materials and labour shortages remained a pressing constraint on activity in the construction sector. Residential construction activity contracted sharply by almost 7% in the quarter on these pressures, slowing progress in working through a very substantial pipeline of more than 100k homes under construction. Commercial building activity was also weaker, weighing on business investment. Conditions in the established housing market cooled further as the RBA's rate hiking cycle commenced. Housing price declines in the Sydney and Melbourne markets became sequentially larger as the quarter progressed, while price gains across the other capital cities slowed.   

Export volumes rebounded from a weather-impacted Q1 as resource and rural goods exports picked up. The terms of trade likely reset to a new record high as elevated commodity prices supported another strong rise in export prices. Import volumes were boosted by the easing of restrictions on offshore travel and ongoing inventory rebuilding.   

As it stands | National Accounts — GDP

The Australian economy expanded at a solid pace in the March quarter despite significant disruptions associated with the Omicron wave of Covid-19 and major flood disasters in New South Wales and Queensland. Real GDP increased by 0.8% quarter-on-quarter and by 3.3% through the year, taking output to 4.5% above pre-Covid levels. 

Household consumption remained robust rising by 1.5% in the March quarter. The easing of restrictions on travel and at recreation and hospitality venues continued the rebalancing of spending patterns, rotating back to services categories (2.3%) from goods (0.3%). Accumulated savings and the strength of the labour market were supporting this spending despite inflationary pressures causing real incomes to fall for the second quarter in succession. The household saving ratio declined to 11.4% in Q1 but is still well above its long-run average.  

Business investment gathered pace to advance by 1.4% in the quarter. This was driven by the non-mining sector (2.4%) as machinery and equipment spending rebounded from delays caused by supply chain constraints. The residential construction sector continued to be held back by materials and labour shortages; activity fell by 1%q/q following Q4's 1.9% contraction, hindering progress in working through the very elevated pipeline of new homes. 

Assistance provided for the flood recovery response and further pandemic-related spending drove another strong rise in public demand, up 2.6%q/q to be 8% higher over the year. Net exports subtracted substantially from growth in Q1 (-1.7ppts); adverse weather conditions restricted exports (-0.9%) while imports picked up sharply (8.1%q/q) as constraints affecting the production of new vehicles and machinery and equipment eased. Rising imports also assisted in the rebuilding of inventories, contributing 1ppt to quarterly growth. 

Key dynamics in Q2 | National Accounts — GDP 

Household consumption — Strong labour market conditions and the high level of accumulated savings continued to underpin resilient household demand. Spending was rotating back to services categories from goods following the easing of restrictions on travel and at venues.

Dwelling investment — Residential construction activity fell sharply in the June quarter (-6.9%) as the sector continued to be hampered by materials and labour shortages. New home building plunged by 7.7% in the quarter and alteration work also declined (-1.9%).   

Business investment — Private sector capex was soft in Q2 falling by 0.3%. A rise in equipment spending (2.1%) was offset by weakness in buildings and structures (-2.5%) as capacity constraints held back construction work.  

Public demand — Public spending weakened in the quarter (-0.8%) after it was boosted by pandemic and flood-related assistance in Q1. This decline was offset by a rise in investment spending (3.4%).   

Inventories — Are likely to take around 1ppt away from quarterly GDP after inventory rebuilding slowed in the quarter.

Net exports — Added 1ppt to activity in the quarter. Export volumes lifted by 5.5% as resources rebounded from weather-related disruptions and services benefitted from the reopening of the international border. Imports firmed slightly by 0.7%, supported by services (14.3%) as overseas travel started its recovery. 

Australian housing finance falls 8.5% in July

Australian housing finance commitments posted their largest month-to-month decline since the start of the pandemic falling by 8.5% in July. The RBA's rate hiking cycle and affordability concerns are set to see commitments continue to retrace lower. Declines in housing prices are accelerating but from very elevated levels in many markets.  

Housing Finance — July | By the numbers

• Housing finance commitments (ex-refinancing) declined by 8.5%m/m in July to $28.4bn following a 4.4% fall in June. Markets expected a smaller 3.5% fall. Commitments are down 11.3% over the year. 
• Owner-occupier commitments contracted by 7%m/m to come in at $19.1bn (-15.9%yr), more than double the fall posted in June (-3.3%). 
• Investor commitments extended the weakness seen in June (-6.3%) posting an 11.2% fall to $9.3bn. This left commitments unchanged from their level 12 months ago. 
• Refinancing activity rolled off June's record highs falling by 1.2% over the month to $17.9bn (7.5%yr). 

Housing Finance — July | The details 

Cooling conditions in housing markets across the country led to an 8.5% fall in housing commitment in July, the sharpest decline seen since the outset of the pandemic more than 2 years ago. Sentiment in the housing market has come under pressure following the strong run-up in prices over the Covid period leading to affordability concerns and from an aggressive rate hiking cycle from the RBA.  

Commitments to owner-occupiers saw broad based falls across the segment. The value of loans fell to upgraders (-7.4%) and first home buyers (-9.5%), while construction-related (-5.7%) and alteration loans (-3.3%) also declined. 

The decline in commitments came on the back of lower loan volumes. Loans to upgraders were down 6.3% and by 4% for construction-related purposes (new building and/or the purchase of a newly constructed dwelling). But it was a 10.3% fall to first home buyers that stood, with July's total of 8,388 being the fewest number of loans written for a single month going back to May 2019. 

Investor commitments are rolling over after an extraordinary run-up over the past couple of years. At the depths of the pandemic investor commitments troughed at $4.2bn in May 2020 before going on to peak at $11.6bn in March 2022. Despite July's decline, the total ($9.3bn) is still elevated and is around the peaks seen in 2015 and 2017. 

The main themes playing out nationally are reflected at the state level. Owner-occupier commitments declined in every state, with the falls ranging from -1.8% in Tasmania to -10.1% in Queensland. Weakness in the first home buyer segment was a major contributor, in particular in Victoria (-14.4%) and Queensland (-12.6%). Investor commitments continued to retrace from their cycle peaks, though in Queensland, South Australia and Western Australia commitments are still well above their levels from a year ago. 

Housing Finance — July | Insights

A sizeable fall in housing finance commitments in July reflected lower demand as loan volumes declined. Falls in housing prices have accelerated in many markets according to the latest data published by CoreLogic today for August. Housing finance commitments were still at elevated levels in July but these are likely to retrace lower as interest rates continue to rise and falling housing prices weigh on sentiment. 

Source: CoreLogic