Australian dwelling approvals -1.6% in August

Australian dwelling approvals softened broadly as expected in August after rebounding by 12.2% in July that reflected the reopening of the domestic economy. House approvals posted another strong result to be at their highest level since early 2019 but approvals for units remain very weak. 

Building Approvals — August | By the numbers

• Dwelling approvals (seasonally adjusted for the private and public sectors) eased slightly in August by -1.6% to 13,691 after rebounding by 12.2% in the month of July, with the median estimate looking for a larger decline of 2.0% in today's report. Annual growth in approvals pulled back to be near-flat at 0.6% from 6.9%.  

• Unit approvals declined by 12.9%m/m to 4,290 after a 20.3% surge in the month prior. As a result, the pace through the year swung to -18.1% from +9.1%.

• House approvals firmed by 4.6% to 9,402 following on from an 8.1% boost in July. This is its highest level since January 2019. In annual terms, house approvals are up by 12.3%.

Building Approvals — August | The details 

August's report contained mixed details as house approvals lifted for the second straight month coming out of the shutdown but this was more than offset by a fall in unit approvals. The underlying detail (which is not seasonally adjusted) suggested that the weakness in unit approvals in August was concentrated in both the low rise and high rise segments.

Approvals for alteration work to residential properties is now becoming quite elevated in response to the Federal Government's HomeBuilder scheme that offers grants of $25k to put towards a substantial renovation (contract value between $150k-$750k) for contracts entered into between 4 June and 31 December 2020. Approvals of this type lifted by a further 7% in August to $784.3m, with $2.2bn of work having been approved over the past 3 months (see chart, below). Note HomeBuilder also applies to new builds (provided the value of the house does not exceed $750k), so this could also be a factor in driving house approvals higher of late. Non-residential approvals, which are very volatile month to month, look to be improving out of the shutdown with around $12.1bn in approvals going through over the past 3 months.   

Building Approvals — August | Insights 

As expected, approvals softened in August after rebounding sharply in July. The effects of the Government's HomeBuilder scheme are clearly evident in the alterations component of today's report, which is a positive outcome amid a highly uncertain outlook for residential construction given the prevailing weak economic conditions post the initial COVID shock and border restrictions slowing population growth.  

Macro (Re)view (25/9) | Risks starting to rise

Support for the next phase of the economic recovery has quickly become the main focus in Australia, with both Westpac and NAB now expecting further easing in monetary policy from as early as next month. This has seen rates pricing in the OIS market declining by a few basis points to 0.1% on a 1-month outlook; undoubtedly this was also a factor in the depreciation of the Australian dollar this week, albeit amid a notable move higher in the US dollar. These moves came after a speech by Reserve Bank of Australia Deputy Governor Guy Debelle in which he highlighted that with the outlook for both inflation and employment "not consistent with the Bank's objectives over the period ahead, the Board continues to assess other policy options". With the Federal Budget due to be handed down on the evening of October 6, the same day as the next RBA Board meeting, the assessment from some quarters is that sentiment could be boosted by deploying both the fiscal and monetary levers simultaneously in a similar episode to the coordinated measures announced by the RBA and the Treasury back in March.

As to policy options, the deputy governor reiterated the earlier communication from the RBA that it could consider; 1) additional bond purchases, more targeted at the longer end of the curve, 2) intervene in the foreign exchange market, 3) further reduce rates to a still-positive nominal level, and 4) turn to negative rates. With the RBA assessing the Australian dollar as broadly in line with its fair value, the effectiveness of foreign exchange intervention was seen as unclear, while it remains much the same for negative rates. Whether the Board ultimately decides to move in October or not, if a further easing in the monetary policy stance is required a rate cut appears to be the most likely option and this would apply to the cash rate, 3-year Commonwealth bond yield target and Term Funding Facility (TFF) rate, which all currently stand at 0.25%. Under current arrangements, with banks' surplus exchange settlement balances held at the RBA earning 0.1%, there is potentially 15 basis points of scope available to cut rates and still remain positive. The other notable points from the speech were around the RBA's actions to enhance the supply of credit to the real economy and to lower borrowing costs. Here, the deputy governor outlined that the Bank's balance sheet had been expanded by $130bn since February to $300bn currently, which mostly reflects the impact of its bond purchases in support of its 3-year yield target and the take-up from the TFF. Initial allowance drawings under the TFF now stand at $78.7bn (see chart of the week, below), leaving another $5.3bn available to be taken up by the banking sector before the end of the month, with the access window for supplementary ($57bn) and additional allowances ($67.7bn currently) then opening up from October 1.

Chart of the week

On the fiscal front, Federal Treasurer Josh Frydenberg announced that the budget deficit for 2019/20 has been finalised at $85.3bn (4.3% of GDP) and in the July Economic and Fiscal update has been projected to widen to $184.5bn (9.7% of GDP) in 2020/21. Meanwhile, the Treasurer on Friday announced a proposal to roll back the nation's responsible lending laws in an effort to loosen credit standards and support credit flow to aid the economic recovery. Data domestically was light this week but was generally soft. August's preliminary estimate of retail sales declined by 4.2%, with the shutdown in Victoria (-12.6%) accentuating broader weakness across the rest of the nation (-1.5%). The high frequency employment data continued to point to a stabilisation in the recovery in the labour market as the payrolls index eased to 95.5 to be around its level from June. Some better news came from Australia's flash PMI for September that lifted from 49.4 to 50.5 (readings > 50 indicate expansion), indicating that the slowdown in economic activity in August that was driven by the reversal of Victoria's reopening was fading.

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To offshore developments where there was a decidedly risk-off tone in market sentiment over the past week. Among the concerns were perceptions that the timing of additional fiscal stimulus in the US would be delayed, rising virus cases in Europe and the UK leading to containment measures being reinstated, and signs that the initial rebound in activity from the reopening effort was beginning to stall. This was reflected in the week's price action as equity markets in Europe slumped, strength went into the US dollar and long-end Treasuries were bid.    

An unnerving resurgence in the virus over recent weeks in Europe has clearly weighed on both economic activity and sentiment. The euro area flash PMI for September slowed to a 3-month low at 50.9 from 51.9 in August as the service sector fell back into contractionary territory (47.6 from 50.5) for the first time since shutdowns started to be wound back. In contrast, output in the manufacturing sector advanced to a 31-month high at a reading of 56.8 from 55.6 with the bright spot coming in Germany where output lifted at its strongest pace since early 2018. On the consumer, though sentiment improved marginally in rising by 0.9% in September, at a level of -13.9 it remains well below its long-run average (-11.1) and is vulnerable to rolling over if restrictions are progressively tightened over the northern hemisphere winter. Over in the UK, Prime Minister Boris Johnson this week announced a range of new pandemic measures that he indicated could remain in place for up to 6 months. With the Government's furlough scheme due to conclude at the end of October, Chancellor Rishi Sunak unveiled the slimmed-down job support scheme that will partially subsidise the wages of workers who have lost hours from November 1 onwards for a period of 6 months. With the threat of the virus re-emerging, conditions in the UK economy have started to start to lose momentum as September's flash PMI eased back to 55.7 from its 72-month high of 59.1 in August. This was driven mostly back a pullback in the services sector to 55.1 from 58.8, though the manufacturing sector also softened in the month to a reading of 54.3.

Dominating developments in the US have been the seemingly fading prospects for the next fiscal stimulus package to be passed before November's presidential election. However, Speaker of the House Nancy Pelosi and Treasury Secretary Steven Mnuchin to some extent pushed back against this narrative by expressing a willingness for both sides to come back to the negotiating table. There is much riding on more fiscal stimulus, not only from a markets perspective but also in keeping momentum in the economic recovery going, a point emphasised by Federal Reserve Chair Jerome Powell at this week's testimony before Senate Banking Committee. For now, the recovery remains robust with September's flash PMI coming in little changed at 54.4 from 54.6 in August, but as seen in Europe it is vulnerable to fraying if the path of the virus takes a turn for the worse. While the services sector saw activity slow slightly to a reading of 54.6 (from 55.0), manufacturing output advanced to a 20-month high at 53.5 driven by an increase in production and new orders. The key question now for markets now is whether the momentum in the recovery carries over into the December quarter with election, policy, and virus uncertainty in play.      

Macro (Re)view (18/9) | Australian employment continues to recover

Domestically this week, the August labour force report showed the recovery in Australian employment extended to a third consecutive month, albeit coming against a deterioration in conditions in Victoria as the state was placed back into shutdown. Whereas the narrative pre-release was around gauging the extent to which the situation in Victoria would impact the broader labour market, as had been indicated by recent high frequency data points, the good news was that the result surprised even the most optimistic forecasts as employment increased by 111k against a median estimate that was positioned for a decline of 35k (reviewed here). Adding to the 347k increase in employment that occurred through the initial reopening effort in June-July, just over half (53%) of the 871.6k jobs that were lost when the pandemic hit have now been returned to the economy. Understandably, the Victorian shutdown had a notable impact on the labor market there, though not to the severity as occurred when the pandemic emerged initially, with the loss of 42.4k jobs.      

Notwithstanding the headline employment result, with the shutdown coming back in Victoria, this weighed on the broader recovery in the Australian labour market. This was seen by the stalling in hours worked in August (0.1%) at the national level as a 4.8% decline in Victoria offset a 1.8% lift across the other states. Back in June, hours worked rebounded by 4.2% before lifting by another 1.3% in July. Those gains had reduced the decline in the level of hours worked on pre-pandemic times from a trough of -10.4% to -5.5%, but that progress stalled in August (-5.4%). 

Chart of the week

Another area where the Victorian disruption was evident was in the level of workforce participation, which lifted by only 0.1ppt to 64.8%, whereas it had risen by a combined 2ppts over June-July. Weighing on the lift in the participation rate nationally was Victoria (-0.6ppt) as well as a surprising fall in Queensland (-0.5ppt). With headline employment rising sharply and with this muted increase in participation, there was a reversal of the recent rise in the national unemployment rate as it fell to 6.8% from 7.5% against an expected lift to 7.7%. However, given the underlying dynamics outlined, headline unemployment remains an imprecise gauge in the circumstances. More importantly, not least for policymakers, spare capacity in this labour market remains very elevated with underemployment at 11.2% and 18% on the rate of underutilisation.

Certainly from the perspective of the RBA, the message from the Board in the September meeting minutes was that it will be leaving in place a significant degree of policy support to help the economy through what are very difficult and uncertain times. These latest meeting minutes explained that this elevated level of uncertainty around the economic outlook had justified the Board's decision to announce an expansion in the Term Funding Facility, which will provide the banking system with access to additional funding of around $57bn between October and June 2021, with the window for drawing down intial allowances ($84bn) due to close at the end of the current month, while the deadline for accessing additional allowances that become available from October 1 (currently around $68bn) was pushed out by 3 months to the end of June 2021. The minutes also provided insights around the Bank's bond-buying activity, noting that it had to contributed to the effective functioning of these key markets "alongside a significant increase in issuance" from government authorities and reiterated its commitment to step in with more purchases in support of its yield target (0.25% on 3-year AGS) and in the event of similar episodes of the turmoil seen earlier in the year when liquidity in global bond markets seized up. With the RBA backstopping the government and semi-government bond markets, the Board reasoned that the public sector was well placed to use their balance sheets to expand fiscal policy measures. 

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Over in the US, the latest meeting of the Federal Reserve's FOMC made no changes to its policy stance, as expected, as the Committee's updated economic projections indicated its ultra-accommodative settings were likely to remain in place for years to come. After a persistent undershoot on its inflation goal (2%), the Fed's recent regime shift to average inflation targeting will now see the Committee aiming to lift inflation "moderately above 2 percent for some time", to secure longer-run inflation expectations at its targeted level of 2%. Market participants, in search of details as to the specifics on how this will be carried out, were largely left to keep looking by a Fed reluctant to make firm commitments given the uncertainties around the path the pandemic and its effects on the economy and future fiscal support plans. Committee Chair Jerome Powell outlined in his opening statement at the post-meeting press conference that by pledging to leave rates on hold (0-0.25%) until its maximum employment and inflation goals have been achieved and by continuing its asset purchases "at least at the current pace" ($80bn/mth of Treasuries and $40bn/mth of mortgage-backed securities) these actions would best support the economic recovery at the present juncture. Regarding the path of that recovery, the median projections based on the individual views of Committee members pointed to a less severe contraction in economic growth in 2020 (-3.7%) than previously expected (-6.5%) but a slower and more protracted rebound over the following years; 4% in 2021 (from 5.0%) and 3% in 2022 (from 3.5%). Meanwhile, with rates going nowhere, unemployment was expected to take until 2023 to get down to 4%, while the inflation outlook was only seen reaching 2% by the end of the forecast period. It is also worth highlighting that Chair Powell said that for these prospects to be attainable more fiscal support would likely be needed. In terms of the data in the US this week, the outturns were in line with the recent pullback in Citigroup Economic Surprise Index as retail sales disappointed with a 0.6% lift month-on-month in August against +1.0% forecast (control group sales declined 0.1% vs +0.3%), while industrial production was also softer than expected in rising by 0.4% in August (vs +1.0%) and housing starts (-5.1%m/m) and building permits (-0.9%m/m) rolled over after very strong increases in July. 

Across the Atlantic, the Bank of England's Monetary Policy Committee (MPC) maintained existing settings at this week's meeting, with the Bank rate at 0.1% and the target for asset purchases at £745bn (currently standing at $684bn). The main change coming from the MPC was in the meeting minutes that elevated the prospect of negative interest rate policy from an option merely not being dismissed to now coming under increasing consideration, with the MPC having recently been briefed by BoE staff on possible plans for implementation ahead of discussions between the Bank and regulators later in the year. On economic conditions, the MPC assessed that the recovery was occurring gradually, with monetary and fiscal support helping to bolster household spending, though its durability was uncertain given that sentiment remained weak and the labour market was still being held up the government's furlough (wage subsidy) scheme. Data this week underscored this point through a modest uptick in the unemployment rate from 3.9% to 4.1% in July, though the BoE forecasts it to rise to 7.5% by the end of the year with the furlough scheme scheduled to be wound up at the end of October. On inflation, the MPC noted that the decline in headline annual CPI in August to 0.2% from 1.0% reflected a range of temporary government initiatives to support the economy, though it was unlikely to pick up materially over the coming months with wages growth and rents soft. Staying with the inflation theme, euro area CPI was this week confirmed to have declined by 0.2% through the year to August, while core CPI slowed to 0.4%Y/Y from 1.2% in July with a key influence behind this being a temporary VAT cut in Germany. Lastly, in Asia, the Bank of Japan's Policy Board left its monetary settings on hold at this week's meeting, maintaining the line that it would "not hesitate to take additional easing measures", as new prime minister-elect Yoshihide Suga vowed to continue of the regime established by his predecessor of pro-growth policies and structural reforms. 

Australian employment +111k in August; unemployment rate 6.8%

Despite a deterioration in conditions in Victoria associated with the reversal of the state's reopening, the broader Australian labour market continued its post-shutdown recovery in August as employment surprised with a rise of 111k against the median forecast for a decline of 35k. Meanwhile, the upward trend in the unemployment rate reversed falling sharply to 6.8% from 7.5%.   

Labour Force Survey — August | By the numbers

• Employment (on net) increased by 111k (seasonally adjusted) in August coming in completely against expectations for -35k on the median estimate (range: -125k to +75k). July's initially reported increase of 114.7k was revised up to 119.2k.    

• Headline unemployment fell from 7.45% to 6.83%, whereas it had been expected to lift further to 7.7%. Australia's unemployment rate was 5.2% before the pandemic emerged. Underemployment eased by 0.07ppt to 11.16% and underutilisation moved down to 17.98% from 18.71%. 

• The participation rate lifted a touch (+0.1ppt) to 64.8%, with Victoria's shutdown contributing towards preventing a larger increase. 

• Aggregate hours worked were essentially flat in August (0.1%) at 1.683bn hours (-5.1%yr) as a sharp fall in Victoria (-4.8%m/m) offset gains in the other states. 

Labour Force Survey — August | The details

In a complicated report today, the good news was that the recovery in employment was not halted by the reversal of Victoria's reopening, as had been feared and seemingly indicated by the high frequency payrolls data. August's lift in employment of 111k followed on from the gains in June (227.8k) and July (119.2k) as the domestic economy reopened. In total, more than half (53%) of the 871.6k jobs that were lost during the shutdown have been recovered, with 458k jobs being regained over the past 3 months. Part-time employment was most impacted initially and has led this recovery (407k) as full-time work has been much slower to pick up (51.0k).   

In August, the 111k gain in employment was split between a 36.2k rise in full-time work and a 74.8k lift in the part-time segment. Confirming that there is yet a long way to go, as things stand now, the level of full-time employment is around 287k lower than in March before the pandemic hit, while part-time work is down by 126.7k over the period. 

Despite more Australians coming back to work in August, hours worked were virtually flat in the month (0.1%) after gains of 4.2% in July and 1.3% in June, as the shutdown in Victoria (-4.8%) offset increases across the other states; NSW +0.7%, QLD +2.4%, SA +1.8%, WA +3.8% and TAS +4.3%. Overall, total hours worked are still down by 5.4% on their pre-pandemic level in March, but this is from a trough of -10.4% in May.    

The impact of the Victorian shutdown, as well as a surprise fall in Queensland, contributed to a stalling of the recovery in workforce participation (+0.1ppt to 64.7%), which is still around 1ppt down from where it was pre-pandemic. Meanwhile, the employment to population ratio continues to improve (+0.5ppt to 60.3%) having recovered half of its shutdown-induced collapse.  

With many more Australians yet to come back to the labor force and with Victoria yet to reopen for the second time, spare capacity will remain a significant issue for policymakers in this labour market for a while to come. 

The key details for the states are summarised below. Clearly, conditions in Victoria were always going to deteriorate due to the shutdown being reinstated, though the fall in employment (-42.4k) and the associated rise in the unemployment rate (+0.36ppt to 7.1%) were much more modest reactions than it experienced during the nationwide shutdown.  

Labour Force Survey — August | Insights

The overall theme from today's report was one of divergence; conditions in Victoria deteriorating, but not a severely as before, while the recovery across the rest of the nation moved ahead. However, the impact of the disruption in Victoria from shutdown 2 on the broader economic recovery was best reflected by the stalling in hours worked in August.   

Preview: Labour Force Survey - August

The latest update on the Australian labour market for the month of August is due to be published by the ABS this morning at 11:30am (AEST). A rebound in the labour market was underway following the reopening of the domestic economy in mid May, though that progress was halted by the emergence of the virus outbreak in Victoria that led to that state being shut down for a second time and this set back appears to have reverberated across the rest of the nation as indicated by a stalling in the high frequency data.   

As it stands | Labour Force Survey

The recovery in the labour market continued into July as a further 114.7k jobs were restored to the economy following the initial rebound in employment of 228.4k that came through in June as the national shutdown was eased. Through the first two months of the reopening, 343.1k (or 39%) of the 871.5k job losses that occurred over April and May had been recovered. Whereas in June the recovery came entirely in part-time employment (252.0k) as full-time work declined further (-23.6k), July saw gains across both segments with part-time up by 71.2k and full-time lifting by 43.5k.

Following on from a 4.2% rebound in June, hours worked lifted by a further 1.3% in July. Compared with their pre-pandemic level in March, this has moderated the decline in hours worked from -10.4% at the trough in May to -5.5% by July.

Workforce participation continues to recover having risen by 2ppts over June and July to 64.7%, but there is still a long way to go as it entered the pandemic at close to its highest level on record at around 66%. As more Australians return to the labour market, the unemployment rate has continued to rise and in July it had crept up to 7.5%, which is it highest level since late 1998. The improvement in hours worked has been able to moderate the rates of underemployment (11.2%) and underutilisation (18.7%) but these are still extremely elevated levels. 

A full review of July's report is available here

Market expectations | Labour Force Survey

The recovery in the labour market is expected to take a set back in August in response to the reversal of the reopening in Victoria as metro Melbourne entered a stage 4 lockdown and regional areas were placed on stage 3 restrictions early last month. The latest high frequency ABS payrolls data (see chart below) highlighted the scale of deterioration that occurred in the Victorian labour market as the state shut down again, while the recovery in employment across the rest of the nation stalled over the second half of July into early August, before picking up again towards the end of the month.     

Factoring in these developments, the median estimate according to Bloomberg is for employment to fall by 35k in August between a range of forecasts from -125k to +75k. Meanwhile, the unemployment rate is expected to tick higher again to 7.7% (currently 7.5%) with estimates spread between 7.4% to 8.0%.  

What to watch | Labour Force Survey

Given the virus outbreak that led to the reinstatement of containment measures in Victoria, today's report will show the extent of the deterioration that occurred in the state's labour market. During the national shutdown, 198.1k jobs were lost in the Victorian economy with only 52.4k (26%) of these jobs coming back over June and July, which was the softest return (in %age terms) recorded across all the states during the initial phase of the reopening. At the national level, the hours worked measure will again provide the clearest indication of the impact of these effects on underlying activity in the domestic economy. 

Australian property prices -1.8% in Q2; 6.2%yr

Australian capital city property prices according to the latest data from the ABS corrected modestly (-1.8%) in the June quarter amid the sharpest contraction in economic activity on record, heightened uncertainty, and disrupted activity in the housing market as open house inspections and public auctions were prohibited during the national shutdown. This followed a period of three consecutive quarters of price gains that had seen the annual pace of growth rise to a 2½-year high at 7.4%, which has now moderated to 6.2%. More timely data recently reported by CoreLogic showed that price declines across most capitals had slowed by August as turnover started to build up again, though Melbourne was the exception where the weakness had not eased due to the reinstatement of the statewide shutdown.

The full summary of quarterly and annual price changes across the house and unit segments for each capital city market is provided below. Note that the ABS reported that the quarterly outcomes in Hobart and Darwin have been imputed due to an insufficient volume of transactions to adhere to the usual methodology.   

A downturn in the national property price cycle turned from the second half of last year as uncertainty around tax policy abated post the Federal election and the RBA recommenced its easing cycle. The Sydney and Melbourne markets led the upswing and thus saw the sharpest corrections in the June quarter. Prices in Sydney (-2.2%) and Melbourne (-2.3%) declined by similar magnitudes in Q2, skewed towards weakness in the house segment in both markets. Annual price growth in the two major markets remained strong but has slowed; Sydney from 10.0% to 8.1% and Melbourne from 10.4% to 8.8%, noting that the base period coincides with the 2019 trough. 

More modest declines came through in Brisbane (-0.9%), Adelaide (-0.8%) and Perth (-0.7%) in the June quarter. These markets had not seen the same extent of support as in Sydney and Melbourne when the price cycle turned and as a result, the pace of annual growth stayed relatively muted compared to a year earlier; Brisbane 2.3% (from 2.5%), Adelaide 0.7% (from 0.9%) and Perth -0.2% (from -0.9%). Meanwhile, the Canberra market went against the broader trend as prices in the nation's capital lifted by 0.8% to be up by 3.6% and at a near two-year high. 

Macro (Re)view (11/9) | Sentiment driving the outlook

A strong rebound in Australian consumer sentiment provided another reminder this week that virus-related developments are what matters most in terms of shifting the needle for the economic outlook. After falling by 9.5% in August as the severity of the virus outbreak in Victoria sent shockwaves across the nation, consumer sentiment according to the Westpac-Melbourne Institute's monthly index lifted by 18.0% to a reading of 93.8 in September, with the news from last week's national accounts reporting a historic 7.0% contraction in the economy in the June quarter seemingly brushed aside. This takes the index back to its level in June when the Australian economy was just starting to reopen from the nationwide shutdown that spanned between late March to mid-May, with the improvement coming as the reinstated containment measures in Victoria slowed new virus cases to a daily average of 76 in the first week of September from 471 a month earlier. How confidence has responded to the roadmap to reopening recently outlined by the Victorian Government, which proposes to leave the current activity restrictions largely in place until late October and requiring the case count to meet prescribed thresholds for these measures to be eased, is yet to be tested.

As was seen back in the May and June surveys, the improved outcomes on the health side have paved the way for a more optimistic view of the economic situation to play through. In September, consumers' outlook for economic conditions over the next 12 months bounced back by 41%, but as noted by Westpac's Chief Economist Bill Evans, near-term expectations are still very pessimistic being some 18% lower than the level that prevailed at the same point last year, while on a 5-year horizon the improvement was also notable at 18.9% to a level that is 2.1% higher over the year. Australians are also clearly noting the benefit of the Federal Government's fiscal support measures that have strengthed household balance sheets with family finances assessed as being 11.2% stronger going forward over the next 12 months and also 11.2% better than a year ago. Regarding discretionary spending, whereas the 'time to buy a major household item' sub-index fell by 13.2% in August, it rebounded by 16.3% in September, but a sense of the degree of caution that exists can be gauged when considering this component is still well down on its level from a year earlier (-12.1%). 

Other key aspects of the report were around the labour market and the housing market. While fears of job losses remain historically elevated at 139.2 (series average is 130.2), the 14.8% improvement this month points to a less heightened view of the situation and this appears in line with the stabilisation evident in the timely ABS payrolls data over August reported this week. As our chart of the week, below, shows, the pace of job gains has picked up recently in most states, while in Victoria the losses have slowed. 

Chart of the week

Meanwhile, the 'time to buy a dwelling' index in the Westpac-Melbourne Institute survey is reported to have lifted by 3.0% in September to be at a similar level (110.5) to back in June through the initial stage of the reopening. The easing of the national shutdown saw activity in the housing market get going again fairly quickly as highlighted by this week's housing finance data for July that showed lending commitments rising by a much stronger-than-expected 8.9%, with the owner-occupier segment leading the way posting its fastest month-on-month gain (10.7%) in more than 11 years (see more here). In the week's other main development, the NAB Business Survey for August reported a lessening in the severity of the weakness in firms' confidence (from -14 to -8) with Victoria showing the largest improvement of all the states with the virus outbreak coming under control. However, business conditions rolled over again (from 0 to -6) and notably provided a more pessimistic view on the labour market with the employment sub-index falling 11 points to -13, together with declines across the trading (-3pts to -2) and profitability (-4pts to -3) measures.

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Most of the attention offshore this week was in Europe for the latest ECB policy meeting. As was expected, the Governing Council made no change to its policy settings, but the interest going into the meeting mainly revolved around the updated set of staff macroeconomic projections and the recent appreciation of the euro. On the outlook, the ECB's baseline assessment is for the euro area economy contract by a slightly less severe 8% in 2020 compared to -8.7% previously, largely because the decline in GDP in the June quarter (finalised this week at -11.8%q/q) was better than expected, while the pace of the expected recovery was essentially unchanged at 5.0% in 2021 (from 5.2%) and 3.2% in 2022 (from 3.3%). Meanwhile on inflation, despite falling sharply in August on both a headline (-0.2%Y/Y) and core basis (0.4%Y/Y), the outlook remains unchanged this year at 0.3% before lifting to 1.0% in 2021 (up from 0.8%) and 1.3% in 2022 (no change). Core inflation is still seen at 0.8% in 2020, but the real surprise to markets was the upgrades in 2021 to 0.9% from 0.7% and in 2022 to 1.1% from 0.9%. The ECB's mandate targets inflation of below, but close to, 2%.   

This upgraded set of growth and inflation forecasts made for a difficult balancing act for ECB President Christine Lagarde in the post-meeting press conference; on the one hand suggesting the economic outlook was improving but on the other still weak and in need of support. Key for markets were President Lagarde's comments on the level of the euro, though the message repeatedly was that it was something the ECB "monitor" but "do not target". With no immediate concern evident, the euro was given the green light to rally further. A blog post by the ECB's Chief Economist Philip Lane the following day gave greater prominence to the appreciation of the single currency by noting that it "dampens the inflation outlook" and that while the Governing Council's easing of monetary policy since the pandemic had emerged was supporting the economy there was "no room for complacency", seemingly indicating the door was ajar for further action. Also touching on the FX theme, Cable declined sharply this week (-3.6%) as Brexit-related uncertainty weighed on the Sterling as the UK Government sought to rewrite elements of their withdrawal agreement with the EU.   

Over in the US, sentiment in markets has generally been risk-off over the past week in which tech-driven sell-off in US equities continued, with the Nasdaq index falling by 7.2% over the past fortnight, while long-end US Treasuries were bid. In the absence of a clear catalyst, the moves came during a holiday-shortened and generally light week for data in the US. Some rising concern may be evident over the willingness in Washington to reach a deal for the next fiscal stimulus package, the latest attempt never gaining any traction as the Republicans tabled a slimmed-down $500m proposal in the Senate that failed to secure enough votes to be progressed further. Given the Federal Reserve's recent shift to average inflation targeting, the data highlight was a stronger-than-expected outcome for CPI in August with the headline measure advancing to 1.3%Y/Y from 1.0% (consensus was 1.2%) while the core (ex-food and energy) reading, which had been expected to remain unchanged, firmed to 1.7%Y/Y from 1.6%.  

Australian housing finance rises 8.9% in July

Australian housing finance posted a stronger-than-expected increase in July as the recovery driven by the reopening of the national economy in mid-May continued. Weakness in Victoria over this period was already clear before the state moved back into lockdown. 

Housing Finance — July | By the numbers

• Housing finance commitments (ex-refinancing) in value terms lifted by 8.9% in July to $18.917bn (median forecast was for a 2.0% rise) following on from a 6.4% advance in June as the economy started to reopen. Annual growth accelerated to 11.8% from 4.7%. 
• Owner-occupier commitments increased at their fastest pace in a single month since March 2009 rising by 10.7% to $14.333bn, which followed a 5.8% lift in June. Growth through the year rose to 18.5% from 8.9%. 
• Refinancing commitments to owner-occupiers slowed by a similar magnitude (-11.8%) as the month before (-11.5%), though the level is still elevated at $7.843bn (46.2%yr), indicating that borrowers remain active in taking advantage of more competitive offers in the market.
• Commitments to the investor segment have lagged in the reopening, though they still increased by another 3.5% in July to $4.584bn after an 8.3% rise in the month prior. The pace of growth over the year remains negative at -5.1% from -5.8% in June.

Housing Finance — July | The details 

The easing of restrictions from mid-May in most states helped activity to get going again in the residential housing market and this was reflected in these data for June. This has then carried over into July led the owner-occupier segment, alongside an understandably more muted recovery from investors amid uncertainty over the outlook for housing demand associated with the border restrictions and rent deferrals. 

Approvals made to the owner-occupier segment to purchase established homes have increased sharply since the national shutdown ended posting back-to-back rises of more than 10% over the past two months, with the level now slightly above where it was when the pandemic emerged (green line in the chart below). Construction-related approvals have also rebounded, lifting by 4.0% in July after a 1.9% rise in the month prior.   

   

A key contributor to the recovery in the owner-occupier segment has been from first home buyers, with both approvals and commitments having lifted sharply off the low point in May.   

The state detail is provided in the table, below. This highlights the outperformance from the owner-occupier segment. 

The pick-up in the value of owner-occupier commitments since the reopening has been sharp in NSW (23%), QLD (33%), SA (22%), WA (35%) and TAS (21%), though Victoria has been flat (0.1%).

It has been a similar story in the investor segment over the past two months, with gains in NSW (18%), QLD (20%), SA (12%), WA (32%) and TAS (27%), while Victoria has declined by 0.8% over the period.  

Housing Finance — July | Insights

The rebound in housing market activity continued into July from the mid-May easing of restrictions in most states. Victoria has clearly lagged behind and greater weakness will be evident from next month to reflect the impact of restrictions being brought back to contain the virus outbreak there. The owner-occupier segment is leading in the recovery with activity from first home buyers coming back strongly.   

Macro (Re)view (4/9) | Historic fall in Q2 Australian GDP

In the events of the past week, the full scale of the disruption that occurred in the Australian economy through the national shutdown was revealed. Real GDP contracted by its most on record falling by 7.0% in the June quarter (see chart of the week, below) to be down by 6.3% year on year, while hours worked across the economy were down by 9.8% in Q2 (full review here). Overall, activity in the domestic economy declined by 7.2% over the first half of the year, an extremely severe shock but relatively modest for this pandemic episode compared to what has been endured in other advanced economies (UK -22.1%, euro area -15.2% and the US -10.2%), reflecting differences in the scale of the initial virus outbreak and the severity and duration of containment measures. 

Chart of the week

The nature of the shutdown in Australia centred on the closure of non-essential services, travel bans, and restrictions on general mobility. As such, the economic contraction in the June quarter was overwhelmingly driven by household consumption, which collapsed by 12.1% (-12.7%Y/Y), accounting for 96% of the decline in the level of GDP. This came as the largest component of the economy in services-based consumption, including areas such as travel, hospitality and recreation, was the hardest hit by the restrictions falling in the order of 18%. In response to a severe dislocation in the labour market, fiscal support from the Federal Government was a key theme in the quarter, with the ABS reporting that the JobKeeper (wage subsidy) policy, enhanced social assistance payments, cash flow assistance for businesses, together with allowing the early access to superannuation accounts and loan and rent deferrals added around $67bn to household income. With the shutdown occurring and with confidence having deteriorated very sharply, the household saving ratio surged up to its highest level since the mid-1970s at 19.8% from 6.0%. This has significantly bolstered household balance sheets and will help support the economic recovery, with other areas such as business investment (-3.5% in Q2, -5.5%Y/Y) and residential construction (-6.8% in Q2, -11.2%Y/Y) likely to remain weak for some time weighed by uncertainty over the economic outlook. This underscores the importance of fiscal support ahead of the upcoming Federal Budget in October. A key aspect of the economic response to the pandemic in Australia has been the coordination between fiscal and monetary authorities and this continued this week with the RBA announcing changes to its Term Funding Facility, increasing its maximum size to around $200bn from around $152bn currently. Meanwhile, Governor Lowe in his decision statement at the conclusion of the September meeting noted the Board would "consider how further monetary measures could support the recovery" (see here).

The near-term outlook faces headwinds generated by the re-escalation of virus cases in Victoria that led to the reversal of the reopening in that state, a labour market that is still a long way from being repaired, and ongoing restrictions constraining the capacity of the economy. A range of indicators this week provided some insights into these dynamics, including the ABS Household Impacts of COVID-19 survey for August that highlighted effects on confidence not only in Victoria but also in the other states (see here). National retail sales growth in July was moderated to a 3.2% rise as spending in Victoria declined in response to the early impacts of the reinstatement of restrictions in Melbourne (see here), while house prices in the capital showed an outsized fall in August of 1.2% compared to the Sydney market (-0.5%) and combined capitals (-0.5%) according to CoreLogic's latest data. Also on the housing theme, the reopening of the economy appeared to be the key factor behind a 12.0% lift in dwelling approvals in July, with strength coming through from the detached (8.0%) and unit (20.1%) segments (see here). Likely also reflecting the reopening was a rebound in import spending in July (6.9%mth) as firms rebuilt inventory levels, while a decline in export earnings (-4.4%mth) on commdities weakness led to the trade surplus narrowing to its lowest level in 5 months at $4.6bn (see here).   

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Moving offshore, the latest employment report in the US continued to support the narrative of improving economic conditions, even if at a moderating pace, as non-farm payrolls in August advanced by 1.371mn in a slight upside result on the consensus estimate of 1.35mn. This extended total job gains since the reopening out to 10.6mn, representing the recovery of around 48% of the jobs that were lost over March and April as the pandemic emerged. Alongside August's job gains was an uptick in workforce participation to 61.7% from 61.4% as more Americans reconnected with the labour market. Rounding out the report, the unemployment rate declined sharply from 10.2% to 8.4%, coming in well ahead of the median estimate situated at 9.8%, while spare capacity more broadly reflected in the underemployment rate fell from 16.5% to 14.2%, down from a peak of 22.8% in April. The latest readings on business activity in the US were also broadly positive this week. The ISM manufacturing index for August lifted to 56.0 from 54.2 (readings > 50 signal expansion), notching a 4th consecutive month of expansion. This was led by a 6.1% surge in the new orders component, with 15 of the 16 measured industries reporting increases in their order books over the past month. In the services sector, the ISM services index softened slightly to 56.9 from 58.1, but this still brought up a third straight month of expansion in activity. This moderation was driven by a notable slowing in new orders (-10.9%), albeit from a very elevated level (67.7) in July, though export orders rebounded by 6.5% in August. Meanwhile, following the recent shift in the Federal Reserve's policy regime to average inflation targeting, several officials from the central bank spoke publically this week. Of note, were the comments from FOMC member Lael Brainard that she anticipated policy would be set "to accommodate rather than offset inflationary pressures moderately above 2 percent, in a process of opportunistic reflation", while Vice Chair of the Fed Richard Clarida indicated that forward guidance and enhanced asset purchases remain the Committee's preferred policy tools at this stage, ahead of yield curve control and negative rates.    

Across the Atlantic, the scene is set for what will be an interesting meeting next week for the Governing Council of the European Central Bank following the recent appreciation of the single currency in both US dollar and trade-weighted terms. A  Financial Times article quoting a few ECB officials gave the impression that the exchange rate, while not yet of significant concern, has the potential to cause headaches should the appreciation be extended. Underscoring these potential concerns, the ECB's Chief Economist Philip Lane was quoted by Bloomberg saying "the euro-dollar rate does matter" as it is a factor that influences its economic outlook and policy settings. On the other hand, Governing Council member Isabel Schnabel in a Reuters report provided another perspective, outlining that the euro appreciation reflected more positive developments from the continent, such as the recent agreement of the €750bn EU recovery fund and improved global confidence that is supportive of trade and growth prospects, in turn, benefiting the outlook domestically. For the moment, the data this week emphasised that the risks are clearly on the downside. Momentum in the pace of the economic recovery slowed in August, but still pointed to an expansion of activity in the month, as the IHS Markit Composite PMI reading moderated to 51.9 from 54.9 (readings > 50 signal expansion). The key influence was a slowdown in the service sector to 50.5 from 54.7 in July, reflecting contractions in output in Italy and Spain in response to the effects of the ongoing restrictions constraining capacity and renewed virus concerns. Meanwhile, the manufacturing sector remained resilient with the pace of expansion in August effectively unchanged on the month prior. The initial rebound from the consumer coming out of the shutdown is also fading as retail sales volumes declined by 1.3% in July (0.4%yr), coming against expectations for a 1.0% rise. Of more concern, particularly at the ECB, will be the weaker-than-expected outcome from the flash estimate of the Consumer Price Index for August, which turned negative to -0.2%Y/Y from 0.4%, while core inflation weakened to its slowest pace on record at 0.4%Y/Y from 1.2%.