Partial indicators of Australian activity ahead of next week's GDP outcome for the March quarter highlighted events locally this week. Construction work done came in a touch better than the consensus estimate of 2.1%, rising by 2.4% for Q1 (reviewed here). Combined, this was the strongest quarterly lift in output from the sector in 3½ years, though despite this total activity was still 1.1% lower than a year earlier. The main theme was the strength in residential construction where activity is really stepping up on the back of the HomeBuilder scheme, first home owner grants and low rates. Private sector residential work saw its sharpest lift in 6 years, with activity lifting by 5.1% as alterations surged up by 11.3% and new home building advanced by 4.1%. Though for the latter, there is a vast difference between detached housing that is accelerating (up 10.2% in Q1, 10.6%Y/Y) due to the stimulus measures being targeted at the segment as against a weakening higher-density segment (-4.4% in Q1, -9.8%Y/Y) where oversupply is a key factor with the international borders closed. Work in the non-residential sector was reported to have fallen by 1.6% in the quarter, though as we'll cover later this was in contrast with the Q1 capital expenditure data. Elsewhere in the report, engineeering work (2.2%qtr) was turning higher as public sector work (4.3%qtr) was on the rise with state governments bringing forward infrastructure projects to provide support to the recovery effort locally.
Meanwhile, the strength of the recovery in the national economy from the depths of last year is now flowing through to business investment. Private sector capex outpointed all estimates in rising by 6.3% in Q1, turning growth through the year positive (0.8%) for the first time in more than 2 years (reviewed here). Equipment spending is soaring rising by 9.1%q/q after growth of 7.3% in Q4, with businesses making important upgrades to meet rising demand and to take advantage of the government's expansion to asset write-off provisions. This is most evident in the non-mining sector where equipment investment has rebounded by a little more than 20% off last year's low (see chart below). Capex on buildings and structures lifted 3.8% in Q1, counter to the decline reported in non-residential work in the construction activity data. The reason relates to the difference in methodology between the two: the capex data reports businesses' payments for building work whereas the construction activity data measures the value of work actually completed by builders and is thus the more relevant guide for GDP purposes. Reflecting the rise in business confidence and conditions to record highs in the NAB survey, investment intentions are being revised upwards to capture the upside expected from a positive outlook. Investment plans in the current financial year were lifted by 2.2% to $124bn, while the second estimate of intentions for 2021/22 was upgraded by 7.9% on the figure put forward 3 months ago to $113.6bn, placing plans back on their pre-pandemic trajectory. There are several key events upcoming next week including the latest RBA meeting and Q1's National Accounts (previewed here).
Chart of the week
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Offshore, it has been the talk of when the tapering discussion at the Fed might commence that has been leading the narrative. Meanwhile, the Reserve Bank of New Zealand became the latest central bank to take on a more hawkish leaning in communications in a similar manner to the Bank of Canada recently. At the Fed, while officials aren't giving much away, the line from the previous meeting's minutes is being repeated publically that the time to discuss a plan on tapering at the Committee level may be approaching. This was raised by the likes of Vice Chair Clarida and other voting members Quarles and Daly this week. But it is the data flow that will dictate the timing of those plans, and it will be a patient approach taken for as long as the Committee's central view for high inflation readings to prove transitory remains. For now, the Fed's preferred measure of inflation has surged to its strongest annual pace since 1992, with the core PCE deflator rising to 3.1%yr in April from 1.9% on a combination of reopening and base effects.
Talk of tapering has also been building ahead of the ECB's upcoming meeting on June 10. The brightening outlook in Europe with the economy set to rebound sharply over the summer has prompted a rise in Germany to their least negative level in 2 years, with the thesis being that the better macro conditions would open the door for the ECB to slow the pace of its asset purchases. But that is far from the indications that ECB officials have been giving. President Christine Lagarde, executive board member Panetta and the governors of the central banks in France and Greece in recent appearances have all been in alignment that discussion around tapering is premature before the recovery has re-established itself following the setback it was dealt from the return to lockdowns. Closer to home, the RBNZ had a hawkish surprise for the markets at this week's meeting. All policy settings were left unchanged but there is an increasing level of optimism by the Committee in the economic outlook both domestically and offshore. The Bank's Monetary Policy Statement reintroduced projections for the benchmark interest rate and the path had a rate hike fully factored in for the second half of next year. While there is clearly a lot of conditionality around this it does emphasise the shift in the RBNZ's thinking from last year when during the height of the pandemic it was openly discussing the possibility of taking its policy rate negative.
