RBA on hold; statement little changed in September

The Reserve Bank of Australia (RBA) met in Sydney earlier this afternoon, with the Board keeping the benchmark cash rate on hold for the 23rd consecutive meeting at the record-low of 1.5%. The result was unanimously expected by economists and markets and now extends this period of stability past the 2-year mark.    

In Governor's statement that accompanied the decision, there were few changes from when the Board last met in August. 

The RBA maintained their outlook for growth in the domestic economy to average a little over 3% in 2018 and 2019, which is expected to be supported by strengthening investment from the non-mining sectors, investment in public infrastructure and resource exports. Drought conditions, though, are impacting the farm sector.  Household consumption remains an ongoing uncertainty.

The statement touched on recent weakness in the domestic currency, which it attributes to strength in the US dollar. Overall, though, it noted that "the Australian dollar remains within the range that it has been in over the past two years on a trade-weighted basis". 

September's commentary on the labour market appeared more upbeat; the unemployment rate is at a near 6-year low at 5.3%, it has received reports of skills shortages in some areas and noted that wages growth has "picked up a little recently". Wages growth is expected to lift gradually in line with a tightening labour market. 

Q2's Wage Price Index showed wages growth at 2.14%Y/Y, with a gradual lift over the past couple of years, although that has been boosted by strong minimum wage rises. 

Commentary on the housing market was unchanged, which was a surprise to some observers given that in the past week one of Australia's major banks, Westpac, increased its standard variable mortgage rate by 14 basis points (0.14%) in response to higher wholesale funding costs, while other lenders have followed suit. Property prices also continue to decline, with yesterday's CoreLogic Home Value Index showing its 11th consecutive monthly fall on a national basis. 

The final paragraph was unchanged. 

Financial markets continue to push back the timing of their expectation for the next cash rate increase. Market pricing currently points to a below-50% chance of a 0.25% increase by February 2020.  

Australia's Current Account deficit widens in Q2

The ABS' Balance of Payments data for Q2 showed a larger widening in Australia's current account deficit than expected, while net exports are expected to make a smaller contribution to GDP growth in Q2 than in Q1.

Meanwhile, in separately released data, the ABS reported that public demand is expected to add 0.2ppt to the quarterly growth figure led by consumption.  

Balance of Payments — Q2 | By the numbers

• Current Account deficit increased by $1.79bn to -$A13.47bn versus market expectations for a smaller deterioration to -$11bn (prior rev -$11.68bn from -$10.47bn). 
• Trade Surplus declined by $532m in Q2 to $A2.81bn (prior rev $3.34bn from $4.08bn) 
• Net exports are expected to add 0.1ppt to Q2 GDP growth (exp +0.1ppt, prior +0.3ppt)

Balance of Payments — Q2 | The details 

The deterioration in the current account deficit was larger than expected and was driven by an increased primary income deficit of $1.10bn to $A15.93bn, with returns to foreign investors up 6% in the quarter. The recent outcomes for the current account deficit have been; -$11.68bn in Q1 2018, -$16.43bn in Q4 and -$12.45bn in Q3.

Over the quarter, the trade surplus reduced by $532m to $A2.81bn. Export volumes lifted by +1.1%q/q, with goods +1.1% and services +1.2%. Import volumes lifted by +0.4%q/q on mixed detail; goods +1.7% but services -3.8%. Given export volumes increased by more than import volumes, the ABS reported that net exports are expected to add +0.1ppt to GDP growth in tomorrow's National Accounts for Q2.  

The volume data reflected movements in prices, with export prices up by +1.4% compared to imports at +2.8%. As a result, the Terms of Trade fell -1.3% in the quarter.  

Balance of Payments — Q2 | Insights 

With all partial indicators now to hand, market economists will now revise their assessments for GDP growth in Q2. So far, indications are that the outcome will be around +0.6% to +0.7% in Q2, which would take annual growth to +2.7% to +2.8% — a moderation from the +3.1% annual pace in Q1. 

Australian retail sales fall flat in July

Australian retail sales made a poor start to Q3 as turnover growth fell flat in July. The result was well short of market expectations and a slowdown from the pace in Q2 where nominal sales increased by 1.3%. 

Retail sales — July | By the numbers

• Retail sales were flat in July (0.0%) at $A26.79bn vs the market forecast for growth of +0.3%. Growth in June was +0.4%.
• Annual growth lifted to +2.9% from +2.8%, which reflected a base effect from July 2017. 

Retail sales — July | The details 

Looking across the categories, there were sizeable declines in turnover in July for; household goods -1.2%, department stores -1.9% and clothing and footwear -2.0%. 

Those declines were offset by increases from; food +0.3%, cafes and restaurants +0.6% and other goods (inc. newspapers, books, sporting goods, pharmaceuticals) +1.7%.

 

The annual pace of turnover for household goods slowed to +1.1% in July and has become increasingly subdued averaging +1.9% in 2018. Recent averages show a clear decline; +8.1% in 2015, +3.3% in 2016 and +2.0% in 2017. Weighing on this could be a cooling residential property market; today's CoreLogic Home Value Index for August showed property prices on a national basis recorded a decline for the 11th consecutive month. 

It was also a poor month across the states in July, with growth either flat or in decline for all excluding Queensland. The results were; NSW 0.0%, VIC -0.2%, QLD +0.8%, SA -0.3%, WA -0.6% and TAS -0.3%. Also, the ACT fell -0.6% and the NT -1.6%. 

Annual growth remains strongest in VIC (+5.2%) and has accounted for around 45% of the growth in retail sales on a national basis over the past year. Strong population growth has been a driving factor in this dynamic.  

Completing the weakness in this update, it was also a softer month for retail sales in the online space. According to ABS' estimates, turnover from online retail fell -3% in July to $A1.42bn. 

The online space accounted for 5.5% of total retail spending in July, which was down from 5.7% in June. However, the rise has been rapid — that measure sat at 4.3% in July last year. 

Retail sales — July | Insights 

Today's disappointing outcome highlights the weakness in discretionary spending. Removing the impact of the 0.3% rise from the food category, 'underlying' retail sales fell by -0.2% in July. Annual growth is at +2.1% having trended lower in 2018. 

While employment growth has remained robust for much of the past 18-months, households are faced with headwinds from persistently weak income growth, elevated levels of debt and, more recently, declining property prices — albeit from very strong levels. In spite of those factors, retail sales were surprisingly strong in Q2 so this could be an early indication that a more moderate result is on the horizon for Q3. 

Australian company profits continue to rise

The ABS' Business Indicators data, the lastest of Australia's partial indicators ahead of Wednesday's National Accounts for Q2, was released this morning with company profits continuing to rise and inventories stronger than expected. 

Business Indicators — Q2 | By the numbers

• Company gross operating profits increased by +2.0%q/q, which exceeded the market forecast for +1.3%. Annual growth strengthened to +11.4% (prior +6.1%)
• Wages and salaries lifted +1.2%q/q (prior +0.9%), though, annual growth eased to +4.5% from +4.9%.  
• Inventories lifted 0.6%q/q vs the market forecast for +0.2% (prior revised +0.8%) 

Business Indicators — Q2 | The details

Company profits have been trending up for the past couple of years and that remains in place with overall growth of +2% in Q2 to be running at +11.2%Y/Y.

This continues to be led by the mining sector where profits increased another +4.4% in the quarter, while annual growth is nearly 22%. Stronger commodity prices over the past couple of years have driven a surge in profits in the order of 91% since mid-2016. 

Profit growth in the non-mining sectors was more moderate at +0.6%q/q and +6.2%Y/Y. Over the past year, profits have been supported by manufacturing (+8.3%) and wholesale trade (+16.9%), while strong rises in power prices have lifted the utilities sector (+15.7%).   

Growth in wages and salaries has been firm in recent quarters, which reflects a solid rate of employment growth — this has softened of late — and a lift in hours worked.  Annual growth in the total wages bill of +4.5% is around half the level it was pre-GFC.  

The increase in inventories was broad-based in the quarter with; mining +0.9%, manufacturing +0.2%,  electricity, gas, water and waste services +3.3%, wholesale trade +1.1% and accommodation and food services +1.1%. Retail inventories, though, were flat. 

Business Indicators — Q2 | Insights 

The income measures in these data were solid, particularly for company profits, while growth in wages and salaries are broadly similar to recent quarters. For inventories, the increase this quarter was smaller than in Q1, implying a small subtraction (potentially around -0.1ppt) from overall growth in Q2. 

ASX200 August Scorecard

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

Overall, the benchmark index sits at around decade highs.

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

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

Australian private sector credit growth moderating

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

Private Sector Credit — July | By the numbers

• Total private sector credit growth lifted by +0.4%m/m vs the market expectation for +0.3% (prior was +0.3%)

• Annual growth was +4.4%, unchanged from June after allowing for a downward revision from +4.5%

Private Sector Credit — July | The details 

Looking across the categories the detail was;

•  Housing; +0.4%m/m, +5.5%Y/Y (prior +0.3%, +5.6%)

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

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

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

Private Sector Credit — July | Insights  

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

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

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

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

Australian building approvals rollover in July

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

Building Approvals — July | By the numbers

• Total Dwelling Approvals fell -5.2%m/m to 18,185 vs market expectations for a fall of -2%. Approvals in June were revised up to +6.8%m/m from +6.4%.

• House Approvals fell -2.8%m/m to 9,845. Growth in June was lowered to +3.8% from +4.4%.

• Unit Approvals fell -7.8%m/m to 8,340. Approvals last month were revised to +10.4% from the initial estimate of +8.9%. 

Building Approvals — July | The details

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

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

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

State	July (m/m)	Annual (Y/Y)
NSW	-5.2%	-20.3%
VIC	-4.6%	-8.4%
QLD	-6.0%	+7.1%
SA	-26.5%	-9.1%
WA	-14.7%	-19.4%
TAS	+13.6%	+63.7%
AUS	-5.2%	-5.6%

 Based on ABS 8,731.0

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

Building Approvals — July | Insights 

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

Australian CapEx weakens in Q2

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

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

CapEx — Q2 | By the numbers

• Actual CapEx in Q2 fell -2.5%q/q to $A29.098bn (+0.4%Y/Y), with the median market forecast at +0.6%q/q. In positive news, growth in CapEx from Q1 was upgraded on revision from +0.4%q/q to +1.2%q/q.  

• By asset in Q2; CapEx on equipment, plant and machinery (GDP input) fell by -0.9%q/q, while buildings and structures fell -3.9%q/q

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

CapEx — Q2 | The details 

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

Non-mining sector CapEx was also weak, declining by $113m, or -0.5% in Q2. This was the weakest quarterly result since September 2016, though annual growth is at +5.8%. Breaking this down further; 

• Services industries CapEx fell $177m (-1%) on weaker equipment spending (-1.9%), while construction lifted (+2.9%)

• Manufacturing saw a rise of $64m (+2.7%) from stronger investment in equipment (+4.8%) and construction (+0.5%)  

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

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

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

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

CapEx — Q2 | Insights  

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

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

Australia's construction cycle powers on in Q2

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

Construction Work Done — Q2 | By the numbers

• Total Construction Work Done in Q2 increased by +1.6% to $A53.588bn, which exceeded market expectations for a rise of +0.8%. Revisions saw a sizeable upgrade to Q1, from +0.2% to +2.4% — mostly attributable to the residential sector.

• Annual growth in Construction Work Done was broadly flat (-0.1%)

Construction Work Done — Q2 | The details

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

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

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

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

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

	Residential		Non-residential		Engineering
	Q/Q	Y/Y	Q/Q	Y/Y	Q/Q	Y/Y
NSW	+1.6%	+8.1%	+1.9%	+11.7%	-1.3%	+20.3%
VIC	+6.5%	+10.9%	+15.0%	+18.6%	-6.9%	+32.6%
QLD	-0.4%	-8.5%	-15.7%	-3.0%	-1.5%	+5.8%
SA	+11.8%	+16.8%	+9.5%	+25.5%	+10.1%	+31.3%
WA	-0.6%	-1.3%	+9.1%	-15.9%	-70.7%	-49.7%
TAS	+13.6%	+28.5%	-28.0%	-6.5%	+8.8%	-8.5%

Based on ABS 8,755.0

Construction Work Done — Q2 | Insights 

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

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