Ai Group Economics Weekly, 31 May 2013

I’m sure you will find the following of interest as it gives you an insight into International, Australian and Construction Industry developments all of which is important for future trends and growth of your business.

International Economic Developments

The OECD updated its half-yearly Economic Outlook this week, with a forecast of 3.1% p.a. in global GDP growth in 2013, strengthening to 4.0% p.a. in 2014 and significant divergence continuing in the growth paths expected for the major economies and regions. This would see global growth in 2013 on par with 2012 (3.0% p.a.), and below the average over the decade to 2009 (3.3% p.a.) (see table 1). The OECD sees global growth recovering only slowly, with better prospects in the US being weighed down by recession and a protracted recovery path for Europe and possibly the UK. 

The latest OECD estimates anticipate Chinese GDP growth will remain above the Chinese Government’s target of 7.5% p.a., reaching 7.8% p.a. in 2013 and 8.4% p.a. in 2014. The IMF also

released a revised set of forecasts this week, for the Chinese economy, which match the OECD’s verdict for 2013 but are less positive for 2014. The IMF expects Chinese GDP to grow by 7.75% p.a.

in 2013 (previously 8.0%) and 7.75% p.a. in 2014. All of these estimates reflect the fact that China slowed in 2012 and 2013 (the latest actual growth rate in China was 7.7% p.a. in Q1 2013) for Policy as well as economy reasons. The Chinese Government has not yet announced further stimulus measures and may not even do so, given its desire to target a more manageable (i.e. lower) pace of growth. This has direct ramifications for the global economy (hence the downward revisions in global forecasts) and for major trade partners such as Australia. Indeed, the OECD noted in relation to Australia that:

 “A marked slowdown in China would weigh on exports and the terms of trade, which could hasten the slowdown in mining investment and necessitate increased monetary support.”

On the upside this week (for the global economy and for Australia), the US economy showed further signs of improvement. This helped push up the US dollar against most currencies including

the Australian dollar, which conversely, fell in value against the US dollar to around 95 cents. Consumer confidence in the US improved notably in May, with the Conference Board consumer confidence index jumping to 76.2 points, from an upwardly revised 69.0 in April, its highest level in five years. Recent consecutive monthly gains in this index suggest that consumer confidence may be gaining traction, which is an important prelude to better growth in spending and investment.

Australian Economic Developments

As part of its semi-annual global outlook, the OECD slashed its forecast for Australian GDP growth in 2013 to 2.5% p.a. (previously 3.0% p.a.) (see table 1). This brought the OECD into line with the latest RBA forecasts for 2013 (2.5% p.a.) rather than the more optimistic estimate published by the Treasurer as part of the Federal Budget (2.75% p.a.). The OECD left its expectation for GDP growth in 2014 unchanged, at 3¼% p.a.. The key reason for this ‘gap year’ (as identified by Australian businesses in our own annual Business Prospects survey early this year) is that the transition from

mining investment to other business or household investment, as the main driver of growth will not be a smooth one. Resources-related investment spending appears to have already peaked (see

analysis of the latest ‘CAPEX’ data below), but investment from other businesses and the all important residential construction cycle “remain timid”. The OECD identifies the high Australian dollar and fragile confidence as the main culprits.

With regard to policy settings, the OECD recommends that: the RBA keep the cash rate low; that the Federal Budget supports local demand; and that tax reform be brought  forward. It said:

“monetary policy should remain accommodative in order to underpin activity. The authorities need to gradually balance the public budget so as to restore fiscal leeway. Should activity worsen significantly however, there is scope for fiscal policy to be relaxed to support demand. A tax reform to improve the effectiveness of housing taxation and lower corporation tax by means of an increase in VAT [Australia’s GST] would enhance efficiency”.

This need for support and reform for Australian business was confirmed internationally this week by an annual global index of competitiveness by the (Swiss) Institute for Management Development, which showed Australian businesses’ international competitiveness slipping to 16^thplace in 2013, from 15th place last year and 4th place in 2002. This decline was due to “rising costs

and declining labour market flexibility”. The US regained the number one spot in this survey due to “technological innovation”, while Hong Kong (last year’s winner) ranked third behind Switzerland.

The considerable flow of Australian data this week largely confirmed this outlook for Australia.

Across the states, actual business investment spending (mainly by mining) appears to have already peaked in Western Australia (-12.0% p.a. in Q1) and possibly in the Northern Territory

(-11.8% q/q in Q1, but still more than double actual CAPEX of a year ago) but is still growing in Queensland (+6.6% p.a. in Q1). Actual CAPEX in NSW and Victoria continued to decline (down

11.1% p.a. and 6.6% p.a. respectively). CAPEX in South Australia was relatively flat.

Australian Construction Industry Development

A similar story was evident in the latest Australian Industry Group/Australian Constructors Association (ACA) Construction Outlook Survey. This revealed that after growing by 11.3% p.a. in 2012 (current prices), growth in the total value of non-residential construction work is projected to moderate to 6.3% p.a. in 2013 and 5.3% p.a. in 2014. Looking at these construction sectors:

· Within the engineering construction sector (which is primarily involved in the construction of major infrastructure, mining and heavy industrial resource based projects), slower growth is forecast in the areas of road construction, water and electricity projects and mining construction work. However, transmission & telecommunications is forecast to continue to rise solidly as a result of NBN and  related investment. Growth is also expected to remain strong in the oil and gas processing sector, consistent with major LNG developments already underway.

· Commercial construction activity (industrial buildings, retail premises, hotels, etc.) is expected to remain constrained by weak approvals and commencements. Following growth of 2.4% p.a. in 2012, turnover for commercial construction is forecast to rise by around 2% p.a. through 2013 and 2014, with both the private and public building sectors exhibiting soft conditions.

Other data releases this week also help to illustrate trends in the house construction sector:

· dwelling approvals showed an encouraging increase of 9.1% m/m in April 2013, indicating the housing market may be responding to the run of interest rate cuts by the RBA (even before the latest rate cut in May). In trend terms, total building approvals are now up by 6.3% p.a. over the year to April, an easing from the 8.0% p.a. annual trend rate in February. The annual trend

rate of growth of building approvals in April is the lowest in seven months but nevertheless appears to indicate a stabilisation in growth for this crucial segment of the economy (see chart 4). Most pleasingly in the detail, private house approvals increased by a seasonally adjusted 2.5% m/m in April to be up 18.8% p.a. from a year ago (although a large fall in house approvals in April 2012 boosted the annual growth rate this month). The trend in house approvals is also positive; up by 1.0% m/m and 5.7% p.a. in April.

· The HIA’s monthly New Home Sales survey showed total new home sales increased by 3.9% m/m in April 2013, taking monthly sales to their highest level this year. This included a 6.7% m/m lift in detached house sales, but a fall of 9.4% m/m in new multi-unit sales.

· The RBA’s monthly credit data showed subdued credit growth for the private sector in April (prior to the latest RBA rate cut in May). Total credit grew by just 0.3% m/m (3.1% p.a.). Housing credit grew by 0.4% m/m (4.5% p.a.), business credit was up by 0.2% m/m (1.4% p.a.), while personal credit (unsecured debt such as credit cards) declined by 0.3% m/m (-0.2% p.a.). Businesses and households remain cautious about taking on new debt, and many households (and businesses) are taking advantage of lower rates to reduce their debt principal.