Turf QLD Industry Alert |Australian Economic Developments – Australian Industry Group (Feb 2015)

Australian Economic Developments –  Australian Industry Group (Feb 2015)

At its first board meeting for 2015 on Tuesday, the Reserve Bank of Australia (RBA) unexpectedly cut the cash rate by 25 basis points to 2.25%. The cash rate had been at 2.50% since August 2013 when the RBA last eased monetary policy to stimulate the local economy. In this week’s accompanying statement, RBA Governor Glenn Stevens dropped the previous pledge of “a period of stability in interest rates”. Instead, the RBA now believes “output growth will probably remain a little below trend for somewhat longer, and the rate of unemployment peak a little higher, than earlier expected“. In its latest forecasts for the Australian economy, the RBA has lowered its forecasts and now expects the economy to grow at only 2.25% p.a. in 2014-15 (i.e. well below the trend pace of 3.0% p.a. and below the 2.7% p.a. achieved in 2013-14), before recovering to around 3.25% p.a. in 2015-16 and 3.75% p.a. in 2016-17. The RBA also expects the unemployment rate to increase further from here (currently 6.2%, trend), before beginning to decline in 2016-17.

The seasonally adjusted Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) registered 45.9 points in January 2015 (readings below 50 points indicate contraction). This was an increase of 1.5 points from December 2014. It indicated a slower rate of decline for the construction industry and a subdued start to 2015 across all four construction sub-sectors. January was the third consecutive month that the Australian PCI® has been below the critical 50 points level that separates expansion from contraction, following the industry’s return to growth in mid-2014.

All four sub-sectors of the Australian PCI® contracted (i.e. below 50 points) in January. Steeper rates of decline were evident in both housing and apartment building activity, with house builders noting a further easing in customer enquiries and sales in the start of 2015. Engineering construction continued to exhibit weakness, contracting for a seventh consecutive month. Respondents to the Australian PCI® noted that the construction industry’s weak start to 2015 was due to a further contraction in mining related construction work and unseasonably wet weather conditions.

BUILDING & CONSTRUCTION: A SUBDUED START TO 2015

The latest ABS data showed that total number of dwelling units approved increased by 1.3% m/m in December 2014 to be 2.1% higher over the year (trend). The volatile “other dwellings” component (i.e. flats, units and high-rise apartments) (+2.9% m/m; +0.7% p.a.) underpinned growth in overall dwelling approvals in December. However, new private sector house approvals declined again, by 0.1% m/m in December to be only 2.5% p.a. higher.

This deceleration in demand for new housing is also reflected in HIA’s New Home Sales data, which showed that the number of new home sales declined by 1.4% m/m in December to be 14.4% higher in 2014 (seasonally adjusted).

In established housing, the CoreLogic RP Data Home Value Index showed that dwelling prices across the five major capital cities increased by 1.3% m/m in January to be 8.2% higher than a year ago. Sydney (+1.4% m/m; +13.0% p.a.) and Melbourne (+2.7% m/m; +7.0% p.a.) continued to lead other capital cities in growth in established dwelling prices. Reflecting the ongoing increase in housing prices and moderate growth in dwelling approval numbers, the value of residential building approvals increased by 0.6% m/m in December although it was broadly flat (-0.3% p.a.) over the past year (trend).

In contrast, the value of non-residential building approvals, which include commercial, industrial and other public buildings (e.g. hospitals, schools and community facilities), fell for a fourth month in December (-0.7% m/m) to be down 32.2% p.a. and close to levels last seen during the GFC (trend data). This trend is of particular concern to Australia’s economic outlook as it suggests lower interest rates and the further decline in the Australian dollar have failed to lift “animal spirits” among businesses and stimulate additional investment.

Ai Group “PCI INDEX” January 2015.

Australian PCI® Jan 2015: 45.9↑      UK PCI Dec 2014: 57.6↓        Germany PCI Dec 2014: 50.5↓         Ireland PCI 2014: 63.1↓

KEY FINDINGS

• The seasonally adjusted Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) registered 45.9 points in January 2015 (readings below 50 points indicate contraction). This was an increase of 1.5 points from December 2014. It indicated a slower rate of decline for the construction industry and a subdued start to 2015 across all four construction sub-sectors.
• January was the third consecutive month that the Australian PCI® has been below the critical 50 points level that separates expansion from contraction, following the industry’s return to growth in mid-2014.
• The slightly milder decline in the Australian PCI® in January was mainly due to a less pronounced reduction in construction industry employment this month.
• However, reflecting the recent softening in overall industry conditions, activity, new orders and deliveries from suppliers declined at about the same rates as in December.
• All four sub-sectors of the Australian PCI® contracted (i.e. below 50 points) in January. Steeper rates of decline were evident in both housing and apartment building activity. Engineering construction continued to exhibit weakness, contracting for a seventh consecutive month. Commercial construction also declined, but conditions moved close to stabilisation.
• Respondents to the Australian PCI® said that the industry’s weak start to 2015 was due to a further contraction in mining related construction work and unseasonably wet weather conditions. House builders noted a further easing in customer enquiries and sales. More positively, there were reports of a lift in demand for commercial development projects.

ACTIVITY BY SECTOR

• House building activity declined for a second consecutive month with the sector’s activity subindex dropping by 5.4 points to 40.9 points in January. This signals a further loss of momentum in housing activity into early 2015, consistent with the contraction in new orders seen over the past three months.
• Apartment building activity declined at a slightly steeper rate in January. The sector’s sub-index registered 42.3 points in January, a decline of 1.4 points from December. This was only the second fall in apartment activity since June 2014 and comes after three consecutive months of declines in new orders.
• Commercial construction activity moved closer to stabilisation in January. The sector’s subindex increased by 7.4 points to 49.0 points in January. This is the highest activity reading for the sector in three months.
• Engineering construction activity contracted at about the same rate in January, with the sector’s activity sub-index falling by 0.5 points to 44.7 points. Respondents linked the decline in activity to the diminishing pipeline of mining-related construction work and large project completions.