Australian housing finance upswing extends into 2020

Australian housing finance commitments advanced by a further 4.6% in January as the upswing that occurred over the second half of last year extended into 2020. The strength was broad-based across the owner-occupier and investor segments. 

Housing Finance — January | By the numbers

• Housing finance commitments by value (excluding refinancing) increased by 4.6% in January to $20.734bn, in line with December's rise (revised from 4.4% to 4.5%) and well ahead of the 3.0% lift expected. The rise in annual terms was extended from 14.6% (revised from 14.0%) out to 23.3%; its fastest pace of expansion since December 2013. 
• Owner-occupier commitments posted another 5.0% gain on the month after rising by that pace in December, coming in at $15.031bn, as growth over the year lifted from 18.5% to 26.9% to its fastest since November 2009.  
• Commitments to the investor segment were up by 3.6% in January to $5.704bn (prior rev 3.0% from 2.8%), accelerating annual growth from 5.5% to 14.7%; its fastest since May 2017.  

• Details for loan approvals by number to the owner-occupier segment in January were;
• Loans to purchase established dwellings lifted by 1.1% to 20,881 (3.5%yr)
• Loans for the purchase of newly built dwellings surged by 13.4% in January to 4,283 (48.4%yr)
• Loans for dwelling construction increased by 4.2% to 3,361 (3.7%yr)

Housing Finance — January | The details 

January's 4.6% rise in total housing finance commitments was its strongest monthly rise since September 2016 and came after a 4.5% lift in December. In annual terms, growth advanced from 5.5% to 14.7%, which is a pace last seen back in mid 2017. Whereas the previous upswing in housing finance between Q3 2016 to mid 2017 was driven by the investor segment, this current one has been driven by owner-occupiers with the past few months indicating that investor activity is now picking up as well. There are also other fundamentals at play this time around that have supported the upswing, including a more aggressive rate cutting cycle from the RBA, an easing in macroprudential controls and the earlier turn in sentiment post last year's federal election.

Across the states, owner-occupier commitments in January were driven by the 'major two' through an 8.3% surge in New South Wales (43.1%yr) and a 6.8% acceleration in Victoria (30.4%yr). There were more modest rises in South Australia (2.5%mth, 8.9%yr), Western Australia (1.3%mth, 10.3%yr) and Tasmania (4.1%mth, 0.2%yr). Queensland went against the trend in falling by 2.5% in January (16.7%yr). 

    

In the investor segment, most states advanced in the month; New South Wales 4.2% (8.8%yr), Victoria 1.3% (18.8%yr), South Australia 12.3% (20.3%yr) and Western Australia 2.1% (11.8%yr). There were declines in Queensland -0.4% (17.2%yr) and Tasmania -2.7% (15.4%yr). 

   

Housing Finance — January | Insights

The upswing in Australian housing finance commitments continued at pace at the start of 2020, with the owner-occupier segment continuing to lead but with more signs of rising investor activity. Auction clearances, which provide the most timely update of housing market conditions, have maintained robust momentum through the early part of the new year, indicating that this will continue to flow towards supporting demand for housing finance, though the coronavirus outbreak has presented headwinds for the months ahead. 

Macro (Re)view (6/3) | Global easing ramps up

As the coronavirus continues to spread across the globe, the humanitarian and economic impacts continue to mount leaving policymakers scrambling to respond. As recently as last Friday, officials from global central banks had indicated they would be taking a measured approach on the basis that it was not clear what the scale and duration of the impact would be on their respective economies. A week later, global central banks are now in the midst of a broad-based easing cycle and if market pricing is used as a guide, that will result in rates being lowered to or near their effective lower bounds in a range of economies.

For context, the OECD this week released forecasts that showed the coronavirus was expected to take 0.5ppt off global growth in 2020, falling from 2.9% to 2.4%, with the risk that the effects are larger still if the outbreak proves to be more persistent and intense than the group currently predicts. Of course, the efficacy of monetary policy to deal with a once-off exogenous growth shock is limited, but it still has a role to play in terms of preventing financial conditions from tightening in the interim and then in ensuring that rates are at an accommodative level to enhance the eventual recovery. On Tuesday, for the first time since the days of the financial crisis in 2008, the US Federal Reserve announced an inter-meeting rate cut, lowering the fed funds rate by 50 basis points to 1.0-1.25%, with the Committee's decision statement noting that "the coronavirus poses evolving risks to economic activity". In the post-meeting press conference, Committee Chair Jerome Powell explained that "the risks to the US outlook have changed materially" and that it will "continue to closely monitor developments" and "use our tools and act as appropriate to support the economy". An additional 50 basis points of rate cuts by the FOMC have been priced into the market for its upcoming meeting on 18 March. Also cutting rates by 50 basis points this week was the Bank of Canada, with its Governing Council standing ready to ease further if needed to support economic activity.   

Over in Europe, a statement from European Central Bank President Christine Lagarde was taken by markets as a clear sign that the Governing Council was preparing to ease its monetary policy settings at its meeting next Thursday, though given its deposit rate stands at -0.5% there has also been speculation that it might instead opt to introduce a new lending facility on more favourable terms than in the general marketplace for small and medium-sized enterprises impacted by the coronavirus outbreak. For the Bank of England, the situation may be a more straightforward one as it has the conventional policy space to cut rates with the bank rate standing at 0.75%. 

In this environment, the shift to easier monetary policy stances is not surprising. What markets are wanting is signs of support from fiscal authorities, though progress on this front remains slow, with a lack of follow-through to date from a statement released by G-7 Finance Ministers that outlined they were "ready to take actions, including fiscal measures where appropriate, to aid in the response to the virus and support the economy during this phase". Responses that markets are looking to see are around ensuring countries boost resourcing to their health care systems to contain the severity of the spread of the coronavirus and policies that are targeted at firms in impacted sectors to navigate their way through this upcoming period of disruption such as with tax breaks and lending programs.   

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Turning to the Australian perspective, the domestic economy closed out 2019 with subdued momentum ahead of the forthcoming disruptions in Q1 from the coronavirus outbreak and summer bushfires, placing it in a somewhat fragile position. This week's National Accounts showed that GDP growth in Q4 was 0.5%, slightly stronger than the 0.4% outcome anticipated, with the annual pace lifting from 1.8% to 2.2% but remaining well below trend pace of around 2.75% (for our full review see here). The overall theme was that domestic demand growth is still subdued (0.1%qtr, 1.3%yr) and continues to be centred on public demand (0.1%qtr, 5.1%yr) as weakness in private demand persists (0.1%qtr, 0.1%yr). Continuing to weigh on private demand is slow growth in household consumption with the response to 2019's monetary and fiscal stimulus measures yet to come through, the downturn in the residential construction cycle and an absence of business investment (see chart of the week, below). Over the past year, public demand, including spending and investment by governments, was the leading contributor to activity adding 1.2ppts to GDP growth, which compares to just 0.1ppt from private demand. External trade bolstered the domestic economy through this period with net exports contributing 1.1ppts to activity, but this is now set to rollover given the disruptions to trade caused by the coronavirus, most notably with China, significantly impacting on the domestic tourism and education sectors. 

Chart of the week

To highlight the extent of the shock likely to be forthcoming, officials from the Reserve Bank of Australia and Federal Treasury revealed this week that their preliminary analysis had suggested that the coronavirus would take in the order of 0.5ppt off GDP growth in Q1, while the drag from the bushfires was likely to be around 0.2ppt. With a material risk of a negative quarter of growth in Q1, the outlook for 2020 as a whole has also taken a hit, with the OECD downgrading their outlook for national GDP growth in 2020 from 2.3% to 1.8%. The high-frequency data for January released through the week was generally soft and pointed to the risks ahead. Building approvals were volatile falling by 15.3% in the month as unit approvals pulled back after recent strength (reviewed here), and while that was likely to have been accentuated by seasonal factors, weakness in residential construction activity is expected to persist well into the second half of 2020. The nation's trade performance held up in January as the trade balance came in little changed at $5.2bn (reviewed here), though weakness on the export side (-2.8%mth) is set to intensify as the coronavirus hits inbound tourism and the education sector, while subdued domestic demand conditions remained a headwind for imports (-2.8%mth). Retail spending was wound back by 0.3% in January as the bushfires and smoke haze kept people indoors, with annual growth coming down from 2.6% to 2.0% to be at its slowest pace in more than two years (reviewed here).

Ahead of a likely and more material deterioration in the data flow, the Reserve Bank of Australia announced a 25 basis point cut in the overnight cash rate to 0.5% at the Board's March policy meeting this week (reviewed here), with the decision statement from Governor Philip Lowe outlining that this decision had been taken "to support the economy as it responds to the global coronavirus outbreak". The Board also retained its explicit easing bias and is prepared to lower the cash rate further, a move that is fully discounted in market pricing by May, taking the cash rate to its effective lower bound of 0.25%. Thereafter, its focus will turn to unconventional policy options. Were the Board to have been resistant to the global shift to easier monetary policy stances, the exchange rate would have been at risk of appreciating, becoming a headwind for the domestic economy and further delaying progress in meeting their employment and inflation objectives. On the fiscal side, the Federal government is likely to come through with measures targeted at supporting businesses in the sectors of the economy most impacted by the coronavirus to ease cash flow concerns over the period of disruption. 

Bushfires hit Australian retail sales in January

The first clear signs of the effects of Australia's summer bushfires in the hard economic data are at hand with retail spending declining by 0.3% in the month of January against the median forecast for a flat outcome. In the accompanying press release, the ABS said retailers across the sector reported that the bushfires had impacted business by reducing customer numbers and disrupting trading hours.  

Retail Sales — January | By the numbers

• National turnover fell by 0.3% in the month of January in seasonally adjusted terms to $A27.632bn; a downside surprise on the consensus estimate for a flat outcome (0.0%). Sales in December were revised to show a steeper fall of -0.7% from the -0.5% reported initially.

• Annual turnover growth decelerated from 2.6% (revised from 2.7%) to 2.0% to its slowest pace since October 2017.
• In trend terms, turnover edged up by 0.1% in the month, while the annual pace ticked lower from 2.4% to 2.3%.

Retail Sales — January | The details 

After falling by 0.7% in December, retail sales contracted by a further 0.3% in January. The ABS noted that the pullback in December may have included some bushfire-related impact, though it appeared to be mainly as a result of a bringing forward of spending into November as consumers capitalised on Black Friday sales. In January, though, the effects of the bushfires became clearer to the ABS, noting that: "Bushfires in January negatively impacted a range of retail businesses across a variety of industries". For context, the last occasion of back-to-back declines in monthly retail sales was in July-August 2017.  

As the chart, below, highlights, the weakness was broad-based across the sector in January with declines for household goods -1.1% (0.9%yr), clothing and footwear -1.1% (2.8%yr), department stores -2.2% (0.6%yr), other -0.1% (1.7%yr) and cafes and restaurants -0.3% (1.3%yr). Food was the only category that advanced, rising by 0.4% in the month to be up by 2.7% over the year. If the food category is excluded, total sales declined by 0.7% in January, slowing annual growth from 2.5% to 1.4% — its weakest pace since October 2017.   

While the bushfires and smoke haze kept people indoors, there was no spillover into online retail. As a percentage of total retail turnover, spending in the online space fell from 6.6% to 6.3% in January, according to the ABS's latest estimates. 

  

Looking across the states, the ABS reported that the effects of the bushfires were most pronounced in New South Wales (-0.1%mth, -0.3%yr), Victoria (-0.2%mth, 2.5%yr) and the Australian Capital Territory (-2.3%mth, 1.5%yr). Broadly flat outcomes were recorded in January for Queensland -0.1% (4.9%yr) and South Australia 0.1% (1.0%yr). Western Australia fell by 1.1% in January, which was its worst monthly outcome since September 2017, resulting in annual growth falling from 2.8% to 1.7%. Tasmania and the Northern Territory both declined by 0.5% in January.    

Retail Sales — January | Insights

A weaker-than-expected result as the effects of the summer bushfires on economic activity become evident. Soon after the bushfires were contained and stopped burning, the retail sector faced further headwinds as the coronavirus outbreak from China escalated. There have been widespread reports of panic buying as people prepare to stay away from the shops, so retail spending may see a bounce back in February and or March before likely falling off again thereafter if the concerns persist.   

In review: Australian Q4 GDP; subdued ahead of Q1 headwinds

The Australian economy will head towards a bushfire- and coronavirus-induced slowdown in Q1 2020 with subdued momentum as real GDP growth in seasonally adjusted terms increased by 0.5% in the December quarter, slightly more than the 0.4% median estimate. Annual growth improved from 1.8% to 2.2% but remains well below the nation's potential rate of around 2.75%. In response to the upcoming slowdown, the Reserve Bank of Australia (RBA) announced a 25 basis point cut in the cash rate to 0.5% at its March policy meeting, with the Board prepared to ease further if required. The Federal government has also given indications that it will be forthcoming with measures to support the economy, likely to be  targeted at the sectors set to be heavily impacted such as tourism and education services. The coronavirus outbreak has resulted in a material downgrade to the global growth outlook, with the OECD forecasting a reduction of 0.5ppt in activity from its previous estimate of 2.9% to 2.4% in 2020. This prompted global central banks to show a willingness to support their economies through the impending slowdown, highlighted the US Federal Reserve delivering an inter-meeting rate cut of 50 basis points.   

With the global headwinds set to intensify, the domestic economy is in a relatively fragile position. Domestic demand growth is subdued (0.1%q/q, 1.3%Y/Y) and continues to be centred on public demand (0.1%q/q, 5.1%) amid ongoing weakness in private demand (0.1%q/q, 0.1%Y/Y), with household consumption growth soft on a delayed response to earlier stimulus, residential construction in a downturn and business investment absent. Net exports have been a key support for the nation through this period, but that is set to roll over in Q1 due to the disruptions caused to global supply chains, most notably in China, from the coronavirus outbreak.   

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GDP — Q4 | Expenditure: GDP (E) 0.4%q/q, 2.3%Y/Y

Household consumption (0.4%q/q, 1.2%Y/Y) — In Q4, household consumption advanced by 0.4%, stronger than in the previous two quarters, though annual growth held steady at 1.2%, which is its equal lowest since the GFC. 

Looking at the profile, non-discretionary spending continues to lead (0.5%q/q, 1.9%Y/Y), though discretionary saw a rebound in Q4 (0.3%q/q, 0.3%Y/Y) that was likely associated with a boost from Black Friday promotional sales. Most notably, this flowed through to clothing and footwear (2.1%q/q, 2.2%Y/Y) and furnishings and household equipment (1.3%q/q, 2.1%Y/Y).  

On incomes, household disposable income growth declined by 0.4% in Q4, slowing annual growth from 5.0% to 3.6%. In real terms, disposable incomes fell by 0.7% in the quarter, which moderated the annual pace from 3.1% to 1.9%. This is in the context of a sharp rise in disposable incomes in Q3 driven by RBA rate cuts and tax offset payments from the Federal government. The household saving ratio saw a sharp 2.2ppts rise in Q3 but in Q4 it declined by 1.2ppts from 4.8% to 3.6%, possibly reflecting some use of Q3's income boost, though weakness in consumer confidence is still likely to weigh on spending.  

Dwelling investment (-3.4%q/q, -9.7%Y/Y) — Residential construction activity contracted for a sixth consecutive quarter with a 3.4% fall in Q4, steepening the annual decline from -8.7% to -9.7%, with the sector mired in its sharpest downturn in more than 7 years. New home building pulled back by 4.1% in the quarter to -12.2% over the year and is contracting by its most since the GST-induced slowdown in 2001. This was accentuated by a 2.2% fall in alteration work in Q4, which was 5.0% lower through the year. The ongoing downturn in the residential construction cycle reflects substantial weakness in dwelling approvals from mid 2018 through 2019. As a side note, ownership transfer costs (excluded from the dwelling investment figures and relating to fees associated with real estate transactions) surged by 12.3% in Q4, adding 0.2ppt to overall activity, reflecting the rebound in the national housing market over the second half of 2019.  

   

Business investment (-0.8%q/q, -1.2%Y/Y) — The dynamics for business investment in Australia are clearly challenging as weakness in confidence and uncertainty over the domestic and global economic outlook weigh on capital expenditure plans. After a 1.1% contraction in Q3, business investment, on net, fell by a further 0.8% in the December quarter to be down by 1.2% over the year. This was driven by a 3.3% contraction in non-dwelling investment in Q4, with weakness in both building (-3.0%) and engineering (-3.6%), though over the past year building advanced modestly (4.6%) while there was a substantial pullback from engineering (-12.6%). Machinery and equipment investment lifted by 0.9%, moderating the annual decline from -2.7% to -1.0%. With large-scale LNG projects now complete, mining investment advanced by 5.0% in Q4, swinging annual growth from -8.9% to 3.2%. In contrast, non-mining investment contracted by 3.6% in the quarter and by 2.7% over the year.   

Public demand (0.1%q/q, 5.1%Y/Y) — Over the past year, public demand was the leading contributor to overall activity adding 1.2ppts to GDP growth. That has been centred on public spending (+1.0ppts) relating to health and aged care initiatives, with a more modest contribution coming through from investment (+0.2ppt). In Q4, growth in public demand was broadly flat (0.1%) but was up by a robust 5.1% through the year. Spending posted a 0.7% rise in the quarter (5.3%yr) but was moderated by a 2.3% fall from investment (4.2%yr). 

Net exports (0.1ppt in Q4, 1.1ppt yr) — In addition to public demand, net exports have been a key support to the domestic economy over the past year adding 1.1ppts to GDP growth. In Q4, the contribution was a modest 0.1ppt as export volumes flatlined (3.4%yr) after recent strength and imports contracted by 0.5% (-1.5%yr) in response to a noticeably weaker Australian dollar.  

Inventories (0.2ppt in Q4, 0.0ppt yr) — Inventories added 0.2ppt to GDP growth in Q4 driven by a run-up in the mining sector, possibly due to delays in offshore shipments. Weakness remains notable in the retail sector at a time of soft consumer demand.

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GDP — Q4 | Incomes: GDP (I) 0.6%q/q, 1.9%Y/Y

The real GDP income estimate lifted by 0.6% in the December quarter, matching the production estimate (0.6%) and above the expenditure estimate (0.4%), while annual growth edged up from 1.7% to 1.9%.  

In nominal terms, Australian GDP growth fell by 0.3% in Q4, which resulted in growth over the year decelerating from 5.6% to 4.1%. In the December quarter, national income was hit as key commodity prices rolled over from elevated levels.

This was evident through a 5.3% correction in the nation's terms of trade, which was its steepest quarterly decline since mid 2017, as annual growth was cut from 7.7% to -0.6%.   

  

Private sector company profits (excluding financial corporations) fell by 2.3% in Q4 unwinding their increase from the previous quarter, while annual growth stepped down from 13.6% to 6.3%. This decline was concentrated in the mining sector due to the weakness in commodity prices. Profits by financial corporations posted their softest quarterly increase in 2 years with a 0.4% rise in Q4 and this resulted in annual growth moderating from 5.2% to 3.9% to its slowest pace in 6 years.    

Based on the compensation of employees measure, wages and salaries were a touch softer in Q4 with a 1.0% rise — its slowest in a year — though annual growth still edged up from 4.9% to 5.0%. Despite a recent slowing, employment growth has driven the nation's wages bill on an upward trend over the past couple of years. 

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GDP — Q4 | Production: GDP (P) 0.6%q/q, 2.4%Y/Y

The Q4 production estimate for GDP was 0.6%, coming through in line with the income estimate and above the expenditure outcome, with growth over the year moving up from 2.0% to 2.4%.  

Output continues to be led by the healthcare sector, which expanded by 1.7% in Q4 to 8.3% over the year. The sector has been supported by robust growth in public spending associated with the rollout of the NDIS and aged care services. Mining sector output advanced a little further in Q4 (1.6%), firming annual growth from 7.1% to 7.3%. 

Weighing on output in Q4 were construction (-2.3%), administration and support (-0.9%), arts and recreation (-0.4%) and wholesale trade (-0.1%). Over the past year, agriculture (-2.8%) in response to drought conditions and construction (-3.6%) following the downturn in the residential cycle have weighed notably on the domestic economy. The sector-by-sector breakdown is shown in the chart, below.   

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GDP — Q4 | Prices

The broadest measure of economy-wide inflation — the GDP deflator — contracted by 0.8% in Q4, its first quarterly fall since Q2 2017, reflecting the sharp decline in the terms of trade (-5.3% in Q4), as annual growth declined from 3.6% to 1.9% to its weakest pace in nearly 2 years. The Gross National Expenditure deflator adjusts for changes in the terms of trade and prices on that basis held steady at 0.6% in Q4, with annual growth edging higher from 1.8% to 2.0% to its fastest pace in a year.     

The Consumer Price Index (CPI) on a headline basis lifted by 0.7% in the December quarter, with annual growth firming from 1.7% to 1.8%. The closest proxy in the National Accounts is the household consumption deflator, though it differs in that it is based on dynamic changes in consumer spending rather than the 'fixed basket' methodology in the CPI, with this gauge showing a softening in the quarterly increase from 0.5% to 0.3% and in the annual pace from 1.9% to 1.8%.     

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GDP — Q4 | Productivity

In the December quarter, growth in total hours worked advanced by 0.3% and as this was slower than the rate of output growth (0.5%), GDP per hour worked increased slightly by 0.1%. On an annual basis, hours worked expanded by 1.8% compared to output growth of 2.2%, resulting in a rise of 0.4% in GDP per hour worked. Weak productivity continues to be a structural headwind for wages growth. 

In the market sector (excluding the public sector), hours worked lifted by 0.3% in Q4 and by 1.5% over the year. GDP per hour worked remained broadly flat at 0.1%q/q and 0.2%Y/Y. Real GDP growth per capita saw another modest rise of 0.2% in Q4, with annual growth still subdued despite firming from 0.3% to 0.7%.     

With productivity remaining weak, nominal non-farm unit labour costs lifted by a further 0.6% in Q4 to be up by 2.7% over the year. Adjusting for inflation, real non-farm unit labour costs showed a 1.4% lift in the quarter, with annual growth rising from -0.5% to a still subdued 0.9% in line with elevated spare capacity in the labour market.   

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GDP — Q4 | States

State demand growth was led by New South Wales at 0.5% in Q4, with the annual pace rising from 0.6% to 1.6%, though this is down from 3.6% a little more than a year ago. That broader deceleration remains driven by slow growth in household consumption, which lifted by 0.2% in Q4 to 0.9% over the year, with its most recent high in annual terms coming in Q2 2018 at 3.2%. The rollover in residential construction continues to weigh on the state with total activity falling by a further 2.3% in the quarter and by 16.1% through the year. Meanwhile, business investment has slowed to a 1.7% pace in annual terms from its most recent peak of 13.2% as of Q3 2016. 

Coming after recent strength, state demand in Victoria contracted by 0.1% in Q4, lowering annual growth from 2.1% to 1.3% — its weakest pace in more than 6 years. Household consumption growth is subdued at 0.5%q/q and 1.6%Y/Y. Residential construction is also in a downturn (-1.8%Y/Y), though it is not nearly as severe as implied by the national result (-9.7%Y/Y). The main drag on activity in Victoria over the past year has been a rollover in business investment, which contracted by 3.7%Y/Y to Q4 from a 12.1% expansion through the year to Q4 2018. Public demand has also pulled back led by a slowdown in infrastructure work.    

In the remaining states, demand was broadly weak in the December quarter. Highlighting that point, the strongest result that came through was from Queensland, which posted a 0.2% rise in Q4, though annual growth in that state eased from 1.7% to 1.2%. Here, household consumption growth rebounded by 0.7% in Q4 after falling by 0.1% in Q4, albeit with annual growth holding at a subdued 1.6%. Continuing to weigh on the state are weakness in residential construction and business investment. In South Australia, demand fell by 0.2% in Q4 and was flat over the year, reflecting slow growth in household consumption and weakness in residential construction. 

Demand in Western Australia declined by 0.2% in Q4, though annual growth lifted from 1.1% to 1.7%, which is the strongest pace of all the states. Household consumption growth remained in a gradual uptrend rising by 1.4% through the year. The residential construction cycle remains weak, though the outlook for business investment is constructive following several years of decline and will be driven by the mining sector. In Tasmania, demand contracted by a sharp 1.0% in the quarter as annual growth decelerated from 4.0% to 1.6%. The weak outturn in Q4 was driven by a pullback in commercial building and residential alterations and a slowdown in public demand.  

Australia's trade surplus $5.2bn in January

Australia's monthly surplus on goods and services trade moderated slightly in January to $5.21bn in a better-than-anticipated result where the expectation was for a more material decline to come through. However, the coronavirus outbreak and summer bushfires will have a notable impact on the nation's trade performance in Q1. 
  

International Trade — January | By the numbers

• Australia's trade surplus declined by $166.0m to $5.21bn in January, though markets had anticipated a more material fall to $4.8bn. December's trade surplus was revised up from $5.223bn to $5.376bn. 
• Export earnings fell by 2.8% in the month (-$1.166bn) to $40.122bn, which more than offset the gains from November (1.5%) and December (1.2%). Annual growth fell from 8.3% to -0.2% posting its first contractionary result since December 2017. 
• Import spending fell by 2.8% (-$1.001bn) in January to $34.911bn to more than retrace December's 2.2% rise. Growth through the year stepped down from 5.7% to -1.7%.

International Trade — January | The details

Export earnings sustained a 2.8% hit in January (-$1.166bn) with the aggregate of $40.122bn sliding to its lowest since April 2019. Our summary table (above) shows this was entirely due to weakness on the goods side, specifically in non-rural goods (-$714m) that centred on a sizeable fall in iron ore shipments (-$792m) and the volatile non-monetary gold category (-$735m). A minor moderation came through from rural goods ($236m) driven by rises in meat and cereal exports. Meanwhile, services exports advanced by $54m in the month, and with travel accounting for $25m of that, the ABS confirmed there had been no discernible impact evident as yet from the summer bushfires and coronavirus outbreak.  

    

Switching to imports, growth in expenditure remains weak in line with soft domestic demand and a lower Australian dollar. January's 2.8% contraction (-$1.001bn) was led mainly by a sharp fall in capital goods (-$640m) amid a 12.5% fall in the category over the year. Intermediate goods declined by $466m, mainly due to fuels and lubricants (-$365m) as global oil prices lifted towards the end of 2019. Consumption goods were down by a relatively modest $19m in January to be broadly flat over the year (0.5%), which is a logical response to a lower domestic currency. Services imports are also impacted by exchange rate weakness (-$101m mth) with annual growth slowing to 2.9% from 8.5% a year ago.

International Trade — January | Insights 

Overall, the trade surplus in January was little changed at $5.21bn, whereas markets had anticipated a steeper fall to $4.8bn. Next month, however, significant impacts are expected to start coming through in these data following the disruptions to trade as China went into lockdown after the coronavirus outbreak. A more pronounced bushfire-related impact could also be on the cards, most notably in inbound tourism.  

Australian Q4 GDP 0.5%; 2.2%yr

Activity in the Australian economy increased by more than expected rising by 0.5% in the December quarter, with markets anticipating a 0.4% increase, while growth in annual terms lifted from 1.8% to 2.2% to be equal with its pace at the end of Q4 2018. Momentum in the domestic economy remained subdued through the second half of 2018, with stimulus from
monetary and fiscal policy measures yet to gain meaningful traction. Circumstances have since changed materially as Q1 shapes up as a weak quarter in response to the summer bushfires and the coronavirus outbreak. Yesterday, the RBA responded by lowering the cash rate by 25 basis points to 0.5% and also indicated a willingness to ease further, alongside support from the Federal government, likely to be targeted at the sectors of the economy most impacted. 

  

The overall dynamic remains where private demand is weak, with the economy being bolstered by support from public spending and net exports. 

In Q4, household consumption growth lifted by 0.4% (1.2%yr), with discretionary spending remaining weak despite recent stimulus. Residential construction activity continued to fall (-3.4%qtr, -9.7%yr) as the downturn in the cycle intensified further. However, ownership transfer costs (associated with real estate transactions) picked up sharply in Q4 (12.3%qtr) and added 0.2ppt to overall activity. Business investment contracted further (-0.8%qtr, -1.2%yr) as firms scale back capex plans due to weak confidence and an uncertain global backdrop. It is a contrasting picture, though, with mining investment turning up after 6 consecutive years of decline (5.0%qtr, 3.2%yr) as non-mining investment weakens (-3.6%qtr, -2.7%yr). Public demand was the leading contributor to activity, centred on spending associated with health-related initiatives. Inventories added 0.2ppt to growth in Q4, as expected. Net exports contributed 0.1ppt to activity in the quarter and were a key support over the past year (1.1ppts) but face significant headwinds in Q1.

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RBA cuts the cash rate by 25bps to 0.5%

The Reserve Bank of Australia Board cut the cash rate by 25 basis points to 0.5% at its March policy meeting in Sydney today. This move had been fully discounted in market pricing, while economists had been broadly divided. The decision statement from Governor Philip Lowe outlined that the Board had come to the decision to cut the cash rate "to support the economy as it responds to the global coronavirus outbreak".

While uncertainty abounds in this environment, the governor outlined that "global growth in the first half of 2020 will be lower than earlier expected". As guided in our preview of today's meeting, global central banks had signaled their intent to respond to the shock of the coronavirus outbreak, meaning that the RBA would come into line with this broad-based shift to easier policy stances. As the governor noted; "In most economies, including the United States, there is an expectation of further monetary stimulus over coming months". Not moving in line with this shift would have risked an unhelpful appreciation of the exchange rate.    

Domestically, the coronavirus outbreak was assessed as having "a significant effect" on the economy, most notably in the export sector through education and travel. Moreover, the additional layer of uncertainty it had brought on meant that consumer spending would likely be impacted. As a result, the RBA is anticipating a GDP growth outcome in the March quarter that is "noticeably weaker than earlier expected". Once contained, the governor outlined that the fundamentals are expected to see the economy "return to an improving trend", supported also by measures from fiscal authorities; "The Australian Government has also indicated that it will assist areas of the economy most affected by the coronavirus". The recent uptick in the unemployment rate to 5.3% in January was noted, as was the sudbued wages growth outcome from Q4. On the housing market, there had been "further signs of a pick-up in established housing markets, with prices rising in most markets, in some cases quite strongly". 

The final paragraph noted that with progress towards its employment and inflation objectives expected to be slowed, the Board had assessed that "it was appropriate to ease monetary policy further to provide additional support to employment and economic activity". The Board retained its explicit easing bias and is prepared to lower the cash rate further if the domestic economy requires further support in response to the unfolding impact of the coronavirus outbreak. 

Australian Dwelling Approvals Fall Sharply in January

Australian dwelling approvals showed a volatile outsized decline January driven by a pullback in the unit segment, while house approvals lifted for a third straight month. This result follows rises in total approvals of 10.4% in November and 3.9% in December. 

Building Approvals — January | By the numbers

• Dwelling approvals (including the private and public sectors) on a seasonally adjusted basis fell by 15.3% in January to 13,016, whereas the market had anticipated a 1.0% rise. Approvals in December were revised to show a 3.9% lift in January from a -0.2% result initially reported. 
• On that result, dwelling approvals in annual terms swung from +7.2% (revised from +2.7%) to -11.3%.
• House approvals increased by 0.5% in January to 8,732 (prior rev: +1.0%), though the annual decline steepened from -5.9% to -8.2%.

• Unit approvals had posted strong gains in the previous two months but fell by 35.8% in January to 4,284 (prior rev: +8.0%) as annual growth stepped down from +30.8% to -16.8%. 

Building Approvals — January | The details 

Dwelling approvals made a volatile start to 2020 with a sharp contraction in January. This was driven entirely by the unit segment, with the underlying detail pointing to a drag from high-rise units.  

The state-based results are shown in the table, below. Clearly, January's weakness was centred in Victoria, though this comes after recent strength in that state in the unit segment. Approvals in South Australia and Western Australia also showed declines in the month. New South Wales posted a 3.6% rise in January, though approvals have been volatile in recent months, while Queensland advanced by 8.7%m/m after falls in each of the three months prior. 

The value of alteration work approved to existing residential properties posted its fastest monthly rise of 7.2% since mid 2018 rising to $730.7m (5.4%yr). Non-residential approvals increased by 5.2% to $4.642bn (23.9%yr).

Building Approvals — January | Insights 

Certainly, this was a very volatile result driven by a pullback in the high-rise unit segment after recent strength. Furthermore, timing may have amplified this volatility, with sizeable moves in January not uncommon. Overall, house approvals appear to be stabilising but they remain volatile for units. Further data will be needed to determine whether more weakness comes through, particularly with risks around activity due to the coronavirus now prevalent, or if the positive trend towards the end of 2019 resumes.