Australian Economic News

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Liquidity trap in the making... perhaps, the asset bubble that is blowing Down Under may continue for a long while longer...

Low interest rates fail to quicken the pulse
THE AUSTRALIAN AUGUST 05, 2014 12:00AM

Adam Creighton

Economics Correspondent
Sydney
ONE year of record low interest rates has failed to spark an economic revival, with more than 60 per cent of Australian economic data deteriorating over the past eight weeks.

The Reserve Bank of Australia board today is widely expected to keep the official cash rate on hold at 2.5 per cent for the 12th month in a row, as new Westpac analysis shows more than 60 per cent of Aus­tralian economic data has deteriorated over the past eight weeks.

“The combination of weak commodity prices and a strong currency looks to be more than offsetting current monetary policy settings,” said Westpac’s chief currency strategist Robert Rennie, noting Australian data pulse has spent 30 of the past 31 weeks below its long-run average level.

“This would be consistent with a slowing domestic economy and one that needs further stimulus,” he added, pointing out the local pulse ended July at 41 per cent, a little above 39 per cent at the end of June.

While retail spending rose more quickly than expected in June, home loan and building approvals have been failing to meet expectations since the Reserve Bank’s economic update in May.

The global data pulse — which, similarly, measures the share of new global data weighted by gross domestic product that has shown improvement over the past eight weeks — has dwindled to 46 from its peak of 55 per cent in late April, dragged down mainly by weakness in developed countries.

“This would be consistent with warnings from the IMF that recently cut its global economic growth forecasts for 2014 because of weakness in the US and China,” Mr Rennie said.

Mr Rennie said, adding Japan and New Zealand were the only two developed countries with pulse scores above 50 per cent.

Emerging market countries are doing better, with almost 55 per cent of their data improving, especially in India (76 per cent) and China (57 per cent).

Tensions in Ukraine along with Argentina’s default have lifted global financial volatility in recent weeks while local investors have continued to worry about the weakening commodity prices at the same time as the Australian dollar has stayed high.

Stresses at a Portuguese bank sparked a sharp rise in financial stress in Europe but analysts argue it is an isolated case and remain optimistic Europe’s economic growth will improve modestly over the next year.

“While concern about the end of the ‘taper’ process has increased measures of volatility in some asset markets, financial stress in the US remains close to historical lows,” Mr Rennie said, referring to the US’s withdrawal of monetary stimulus scheduled for completion by October.

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Stability key as RBA keeps rates on hold

THE AUSTRALIAN AUGUST 05, 2014 2:48PM

Adam Creighton

Economics Correspondent
Sydney
THE Reserve Bank of Australia has kept the cash rate at a record low as it waits to see whether unemployment is rising and as investors await Friday’s quarterly economic update from the bank’s economists.

The Reserve Bank board, as widely expected, kept interest rates at 2.5 per cent at its August meeting, making it one year since official interest rates were last lowered to help the economy adjust to the expected tapering of the resource investment boom.

HOLDING STEADY


The Australian dollar remained steady after the annoucement.

At 2:35pm (AEST), the Australia dollar was buying US93.27c, up very slightly from US93.26c just before the RBA’s decision was announced.

Despite rapid growth in house prices, and inflation that has risen to the top of the Reserve Bank’s target range, the RBA has been reluctant to lift interest rates from historic lows because of weak employment growth and fragile consumer confidence in the wake of the federal budget.

Growth in the global economy was continuing at a moderate pace, helped by firmer conditions in the advanced countries, the governor of the Reserve Bank, Glenn Stevens, said in the statement accompanying the decision.

“China’s growth remains generally in line with policymakers’ objectives. Commodity prices in historical terms remain high, but some of those important to Australia have declined this year.

Financial conditions overall remain very accommodative,” the statement said.

Long-term interest rates and risk spreads remained very low and volatility in many financial prices was currently unusually low, the RBA said.

“Although the rate of growth of house prices is slowing, policy makers are likely to be keeping a close eye on the ongoing increases in home values across the two largest cities, Sydney and Melbourne,” said Tim Lawless, an analyst at RP Data.

“It is looking increasingly like the official cash rate will remain at its low setting, at least for the remainder of this year, which should continue to support housing demand,” he added.

The RBA said a strong expansion in housing construction was now under way.

At the same time, resources sector investment spending was starting to decline significantly. “Signs of improvement in investment intentions in some other sectors are emerging, but these plans remain tentative as firms wait for more evidence of improved conditions before committing to significant expansion,” the RBA said.

“Overall, the bank still expects growth to be a little below trend over the year ahead.”

The Reserve Bank’s quarterly statement on monetary policy will be released Friday, including new inflation and economic growth forecasts and providing officials with the opportunity to guide expectations about future interest rate decisions.

With AAP

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Gas fires hopes for export boom
THE AUSTRALIAN AUGUST 06, 2014 12:00AM

Adam Creighton

Economics Correspondent
Sydney
NATURAL gas has surpassed education as Australia’s third-­biggest export, before even the biggest gas projects to come have been built, raising hopes the commodity will bolster the country’s trade balance as the Reserve Bank charts a lower growth future.

The RBA board kept interest rates at a record low of 2.5 per cent yesterday, pointing once again to the likelihood of sub-trend economic growth, rising unemployment, and weak investment outside the mining sector.

The widely expected decision marked the one-year anniversary of the rock-bottom interest rate setting, which economists — divided about whether the next move will be up or down — expect to remain in place until at least early next year.

“Growth was firmer around the turn of the year, but this resulted mainly from very strong increases in resource exports as new ­capacity came on line; smaller increases in such exports are likely in coming quarters,” governor Glenn Stevens said yesterday in a statement that was almost identical to the previous month’s.

The Australian Bureau of Statistics meanwhile showed that Australia’s trade deficit blew out to $1.7 billion in June, the second worst result on record, mainly because of falls in iron ore and coal prices, which have since stabilised at lower levels.

Trade Minister Andrew Robb focused on performance over the whole financial year, noting ­exports had risen 10 per cent to $332bn compared with a 5 per cent increase for imports, which together caused the annual trade deficit to slump by 70 per cent to $6.1bn compared with the previous year.

“The strong rise in resources exports underlines the transition in the resources sector as major projects shift from construction to production phases,” he said, pointing out that gas had overtaken education services over the period as the country’s third-largest export.

“Recently concluded free trade agreements with Korea and Japan will provide even greater opportunities for Australian services exporters,” Mr Robb said.

Tom Kennedy, an economist at JPMorgan who studies the trade figures, said gas exports were expected to rise rapidly over the next two years and ultimately replace coal as Australia’s second-biggest earner.

“And unlike coal, the bulk of the natural gas sales have already been locked in forward agreements,” Mr Kennedy said, noting June gas exports had surged 32 per cent to $1.6bn compared with the previous year.

Iron ore exports in June totalled $6.1bn and coal $3.1bn.

“Around 90 per cent of large-scale resource investment projects are related to LNG and from the second half of next year we’ll see a huge spike in exports,” he added.

Medicines Australia chief executive Brendan Shaw said he was concerned that Australia’s ­export performance was deteriorating at the higher value end, noting a 13.5 per cent drop to $3.4bn in 2013-14 in the sector’s exports, the lowest level since the 2005-06 ­financial year.

“The challenge now is to reverse this fall in medicines exports, and ensure we build capability for the future to develop new investment, jobs, exports and R&D for Australia,” he said.

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Shock jump in unemployment rate to 6.4pc

THE AUSTRALIAN AUGUST 07, 2014 7:31PM

Adam Creighton

Economics Correspondent
Sydney

AUSTRALIA’S unemployment rate has surged to a 12-year high in July as the number of Australians in jobs went backwards, adding to political pressure on the government.

The Australian dollar fell almost half a US cent to US93.10c as the ABS announced the national jobless rate jumped from 6 per cent to 6.4 per cent.

Economists had expected an extra 13,000 new jobs in July, leaving the unemployment rate steady at 6 per cent, but total employment fell marginally while the pool of unemployed swelled to almost 790,000 people.

Full-time employment rose 14,500 to 8.077 million in July and part-time employment was down 14,800 to 3.499 million.

The participation rate — those that have a job, are looking for work or are ready to start work — rose to 64.8 per cent, from 64.7 per cent in June.

Unemployment rate was last this high in August 2002.

Employed people in Australia worked a total of 1.611 billion hours in July, the seasonally adjusted figures showed.

That was down by 0.9 per cent from the 1.626 billion hours worked in June, and up by 0.7 per cent per cent from the 1.599 billion hours worked in July 2013.

The average amount of time worked per employee fell to 139 hours and eight minutes in July, from 140 hours and 25 minutes in June, a fall of 77 minutes or 0.9 per cent.

The country’s unemployment rate has swung between 5.8 per cent and 6 per cent since January, the highest range for more than a decade as job losses in the resource sector haven’t been offset by the gains elsewhere.

Employment Minister Eric Abetz blamed the shock jobless figure on the Senate’s refusal to pass “dynamic economic reforms” such as the mining tax repeal, budget cuts and Australian Building and Construction Commission.

“In that 6.4 per cent are literally hundreds of thousands of our fellow Australians who are without of a job, who want a job, but have been denied a job because of the recalcitrance of (Opposition Leader Bill) Shorten and the Greens in the Senate not allowing the economic reforms to be progressed that would have guaranteed their jobs or, indeed, grown job opportunities,” Senator Abetz said in Wollongong.

“The question the Australian people would be asking, why Mr Shorten have you presided over such an obstructionist opposition that deliberately sought to derail the economic recovery strategy which was so vital for the Australian nation and for the Australian people, to able to reboot the Australian economy?”

Opposition employment spokesman Brendan O’Connor said the figures showed the government’s budget had failed to lift business or consumer confidence.

“This unemployment rate is this is the first time since 2007 that the Australian unemployment rate is higher than that of the United States,” Mr O’Connor said.

“The budget is not the panacea for the economic challenges of this nation. In fact, this is a woeful budget.

“Not only are the measures unfair, they are also not contributing to the environment where you might see business confidence rise, and therefore people hiring.”

Analysts, divided over whether the next move in rates will be up or down, expect the Reserve Bank to keep interest rates on hold at a record low level of 2.5 per cent for the rest of the year.

Pricing in financial markets suggest interest rates will be unchanged this time next year.

The new jobless figures arrive too late to inform the Reserve Bank’s quarterly economic statement, due for release tomorrow.

The Statement of Monetary Policy will include new economic growth and inflation forecasts that expected to chart a fall in annual inflation from its current level of 3 per cent and a fall in economic growth from 3.5 per cent.

The Coalition has promised to create 1 million new jobs over five years, equivalent of close to 17,000 a month.

Around 12,000 new jobs a month have been created since September, more than half of them part-time.

With AAP

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Reserve Bank cuts inflation, growth forecasts
BUSINESS SPECTATOR AUGUST 08, 2014 2:59PM

Mitchell Neems

Business Spectator Reporter
Melbourne

THE Reserve Bank of Australia has lowered its forecasts for both inflation and GDP growth while saying it sees no imminent change to the record low cash rate, which the RBA held at 2.5 per cent for the 12th consecutive month earlier this week.

In its latest quarterly Statement on Monetary Policy, the RBA said it expects GDP growth of 2.5 per cent for the calendar year, a cut to its May forecast of 2.75 per cent. Growth of 2 per cent to 3 per cent was expected for the financial year to June 2015, a cut to the RBA’s previous estimate of 2.25 per cent to 3.25 per cent.

The Australian dollar fell to a two-month low after the release of the statement, which said the “most prudent course” was likely to be a period of stable interest rates.

“With growth expected to be below trend over the year ahead, the unemployment rate is likely to remain elevated before it gradually declines in 2016. With slack in the labour market likely to be evident for some time, wage growth is anticipated to remain low,” the RBA said.

Just a day ago figures showed the unemployment rate rose sharply in July to a 12-year high of 6.4 per cent, higher than the same measure in the United States.

The Consumer Price Index (CPI) was forecast to rise 2 per cent in the year to December 31, a downward revision from a previous forecast of 2.75 per cent made in May. For the next financial year to June 2015 the central bank forecast an inflation rate of 1.75 per cent to 2.75 per cent, down from its previous estimate of 2.25 per cent to 3.25 per cent.

“The key uncertainties for the domestic economy continue to be centred on the timing and extent of the expected decline in mining investment, the associated rise in resource exports and the further strengthening in non-mining activity,” the RBA said.

“While this ‘transition’ has been unfolding for some time, helped in part by the very low level of interest rates, there is no guarantee that the rebalancing of spending will be a smooth process.”

This implies that borrowing rates remain at very low levels, the RBA said, as RBA governor Glenn Stevens reaffirmed his view a period of stability in rates was likely as policy makers wait for the effects of easing to stimulate the economy.

The central bank also noted that the consolidation of federal and state budgets would impact on GDP in coming years.

“Consolidation of state and federal government budgets, if it proceeds as envisaged in the budgets, could weigh on growth in domestic demand,” Stevens said.

While the Australian dollar has eased from a peak last year, the RBA said the exchange rate remains elevated, particularly given the recent declines in commodity prices.

“These factors will be partly offset by the stimulus from low interest rates, which is supporting activity and prices in the housing market and also bolstering household consumption,” the statement said.

The central bank reiterated a view that the growth of dwelling investment and consumption, combined with the direct effect of the low interest rates on borrowing costs and the generally good health of business balance sheets, would eventually spur a recovery in non-mining business investment.

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Business conditions hit four-year high, NAB survey finds

BUSINESS SPECTATOR AUGUST 12, 2014 11:53AM

Elizabeth Redman

Business Spectator Reporter
Melbourne
BUSINESS conditions have soared to a four-year high in July on the back of a surge in construction activity, while business confidence has also strengthened, according to the National Australia Bank monthly business survey.

The survey found conditions jumped to eight points in the month, compared with two points in June, suggesting a strong start to third-quarter demand. Conditions are now at their highest level since early 2010.

NAB chief economist Alan Oster said much of the improvement in conditions was narrowly based, and despite strong readings for sales and profits, businesses were still very reluctant to employ.

“Construction surged again, propped up by high levels of building approvals that will drive construction activity for many months,” Mr Oster said, pointing to continued record low interest rates.

“Wholesale, a bellwether industry, also improved, but remains slightly negative.”

Service industries were also a stand out, while the mining and retail sectors were weakest, the survey found. Structural challenges, political uncertainty and a high Australian dollar continued to weigh, NAB said.

Business confidence continued to rise in the month and returned to post-election highs, supported by the improvement in conditions, a rise in retailer confidence and better forward orders.

Confidence lifted to 11 points in July, compared with eight points in June, NAB found.

“Firms still appear unfazed by the federal government’s ‘tough budget’, possibly taking comfort in the bounce back in consumer confidence,” Mr Oster said.

“Stronger sales and profits are driving the trend, but the recovery continues to be relatively jobless.”

Mr Oster said business confidence had been resilient for the better part of a year and conditions appeared to be responding.

“However, the composition of confidence may provide some cause for reservation about this optimism, at least in the medium term. Outside of construction, only retail is showing especially high confidence.”

He said soft wages growth, a rising unemployment rate and a decline in June quarter retail sales suggested that confidence might be tested.

NAB increased its forecast for unemployment, saying the jobless rate was now likely to peak at 6.5 per cent by the end of 2014, from an earlier forecast of 6.25 per cent, due to weaker growth and changes to ABS measurement. Official data last week showed the unemployment rate spiked to 6.4 per cent in July.

NAB expected that GDP growth was soft in the second quarter, and cut its 2014-15 growth forecast to 3.1 per cent, from an earlier prediction of 3.3 per cent.

Last week, the Reserve Bank of Australia cut its growth forecast for fiscal 2015 to a range of 2 per cent to 3 per cent, compared with its earlier estimate of 2.25 per cent to 3.25 per cent.

The cash rate was likely to remain on hold until late 2015 but there was a chance of a cut, Mr Oster said.

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Cost of wages rises less than forecast
THE AUSTRALIAN AUGUST 13, 2014 12:16PM
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Adam Creighton

Economics Correspondent
Sydney
AUSTRALIAN workers’ living standards went backwards last year and will continue to stagnate this year unless the abolition of the carbon tax causes prices to fall.

Wages rose by 2.6 per cent over the year to June, the Australian Bureau of Statistics said today, compared with a 3 per cent increase in the cost of living over the same period as measured by the consumer price index.

Last week, in the wake of a shock increase in the unemployment rate to 6.4 per cent in July, the Reserve Bank said wage growth had declined to a 15-year low.

Australia’s wage price index, which is a quarterly measure of hourly rates of pay excluding any bonuses, rose by 0.6 per cent between March and June for both private and public sector workers.

But public-sector workers did better over the whole year, enjoying an increase of 2.8 per cent compared with 2.4 per cent for private-sector workers.

The RBA last week revised down its inflation forecast by 0.75 percentage points because the government abolished the carbon tax in July, but warned prices might not fall.

“The timing of the indirect effects is even less certain, as the speed with which cost savings to businesses are passed on to final consumer prices is difficult to predict, owing to the inherent lags with which cost changes pass through the supply chain,” it said.

Assuming removal of the carbon tax does reduce prices, the RBA expects the CPI to rise between 1.75 per cent and 2.75 per cent this financial year.

“Wage growth is expected to pick up only slightly from its current pace over the forecast period, remaining significantly below its decade average of 3.75 per cent,” the RBA said.

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http://www.theage.com.au/business/proper...03q8q.html

Construction indicators rise on infrastructure announcements and housing
Date
August 15, 2014

Carolyn Cummins
Commercial Property Editor

Sunny: The non-residential sector continues to perform.
The potential $20 billion in new infrastructure projects across NSW, including rail and roads in the Western areas and the booming housing market has helped push construction indicators to high level, according to Rider Levett Bucknall.

Its third quarter 2014 International Report says that recent building approval statistics for NSW for the first quarter of 2014 indicate the value of residential building approvals to be 38 per cent above the same quarter in 2013.

Bob Richardson, managing director NSW for Rider Levett Bucknall said that if the current rate of demand for residential apartment construction continues in Sydney, a resources shortfall may eventuate in mid-late 2015, which in turn will push up tender prices.

Craig James, the chief economist for CommSec said home building is a key source of strength and a clear driver of the Australian economy. So many businesses benefit when home construction is solid, so multiplier benefits will extend across the economy.

‘‘Super-low interest rates, still tight rental markets and rising population growth support home building. The outlook remains encouraging. Importantly, homes are only built if the demand is in place, so fears of over-construction won’t surface,’’ Mr James said.

‘‘The lift in home building is positive for builders, developers, household goods retailers and a raft of service-type businesses such as conveyancers, real estate agents and architects.’’

Mr Richardson said the in addition to a strengthening residential market, Federal and State Governments have made major announcements on major infrastructure works such as the Sydney Second Airport and the $11 billion WestConnex motorway.

According to RLB, while such projects are some years away, the commencement of detailed planning has now begun providing confidence that such major projects will commence and will provide new opportunities for additional work.

The possible forward workload for major infrastructure works are likely to mitigate any decline from mining investment in NSW.

The non-residential sector continues to perform at levels similar throughout 2012 and 2013. Competition to secure work to replace work in hand continues to be competitive. However, a risk premium is now considered for any projects that require building contractors to accept development risks.

“The industry outlook for the last quarter of 2014 remains positive in anticipation that new opportunities will arise for the replacement of existing work in hand, particularly for projects up to $50 million in value. Tenders have been received and are currently under review which will in themselves increase activity for projects above $50 million in value.

“Tender price results are generally within expectations, however, structural trade tender costs appear to be increasing above industry average cost increases. The Tender Price Index for Sydney is expected to remain in the range of 3-4 per cent increase per annum overall for 2014 and early 2015,” he said.

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Speculation in the US and safety at home

Baker Philip Baker
654 words
19 Aug 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Philip Baker

Financial markets are in the thick of the year's main games: placing bets on when the US Federal Reserve will raise interest rates and sweating over what happens to bonds, currencies and equities when they do.

But here in Australia it looks like traders are expecting rates to stay where they are until well into 2016.

It won't stop all traders from poring over the release this week of the minutes of the US Federal Reserve's policy-setting meeting last month, while the minutes of this month's meeting by the Reserve Bank and the appearance of governor Glenn Stevens before the House of Representatives Standing Committee on Economics in Brisbane means it's central bank week.

Local traders will focus on why the RBA didn't move to an easing bias after it lowered its growth forecasts in its latest quarterly statement on monetary policy.

Will there be any hints this week about how close the bank is to cutting rates? Some economists, such as Westpac's Bill Evans, think the central bank is being way too cautious with its sombre growth outlook and expect the "consumer will be running at a faster pace in the second half of 2014 than in the first, with some spill-over to non-mining investment and employment".

Evans also says the RBA will be on hold for another 12 months and is expecting housing activity to improve thanks to the narrow gap between the discounted variable mortgage rate and the yield on offer in the Sydney rental market. "The last time the Australian market experienced an investment property boom was in the 2001–2003 period where the margin between the discounted variable mortgage rate and the Sydney rental yield was around 200 basis points compared to the current margin of 50 basis points" he says.

According to Westpac, Sydney rental yields are currently around 4.5 per cent and investors can lock their funding costs in at 0.5 per cent above that.

Not surprising then that new lending to property investors is back at the record high reached in January, 2004.

But then, according to Bloomberg, the Australian "misery index", a combination of inflation and the unemployment rate, is at its highest level since 2008. The unemployment rate is at a 12-year high of 6.4 per cent and doesn't augur well for any consumer spending that's meant to kick in and help growth during the rest of this year.

David Bassanese from BetaShares points out history shows whenever there has been such a large jump in the number of people out of work it normally stays that way.

He has been telling clients that in September 2012, the unemployment rate rose from 5.1 per cent to 5.5 per cent. Three months later, the unemployment rate was still 5.4 per cent, and then kept rising.

"And very little of the 0.3 percentage point increase in the unemployment rate to 4.9 per cent in January 2009 was quickly given back. The same pattern repeated following the 0.4 percentage point increase in the unemployment rate to 6.5 per cent in February 2001," he says.

That's food for thought for those who think the latest unemployment number was a rogue one.

The minutes of the Federal Open Market Committee will be released on Wednesday night and are tipped to throw some light on the Fed's plans for how it will eventually tighten monetary policy.

The US economy is growing at 4 per cent but the yield on the US 10-year bond has hit its lowest level so far this year. In no real order, traders will be wanting to know why the job market is improving but output growth is slow and erratic and productivity is falling.


Fairfax Media Management Pty Limited

Document AFNR000020140818ea8j0002r

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PUBLISHED AUGUST 19, 2014
Aussie misery index highest since 2008 as jobless rate rises

[SYDNEY] A deepening gloom across the largest developed economy to escape recession during the global financial crisis is shaping up as one of the toughest challenges yet for Reserve Bank of Australia chief Glenn Stevens.
Australia's misery index - the sum of unemployment and inflation rates - is at 9.0, the highest since 2008, when the collapse of Lehman Brothers Holdings froze credit markets around the world and triggered the deepest recession in the United States since the Great Depression.
While policymakers from the US Federal Reserve to the European Central Bank are still pumping stimulus into their economies at least in part to address job market slack, Australia's price pressures limit that option for the RBA.
The upshot for the nation's businesses and consumers: little prospect of lower borrowing costs from Mr Stevens.