Latest economic data
- The outlook for home builders is gloomy. Council approvals to build news homes slumped by 6.6 per cent in September. Over the past six months approvals have fallen by 31 per cent – the biggest slide in a decade.
- It was the sixth straight fall in home approvals and eighth decline in nine months. The all-important new house segement was down by 2.2 per cent and apartment approvals crashed by 15.7 per cent.
- Commercial building approvals fell to 5-year lows in trend terms in September.
- A raft of supermarket items fell in price over the past three months. On average over a third of all goods were cheaper in the September quarter than three months ago.
- The services sector is growing again – but for how long? The Performance of Services index lifted from 45.6 to 50.7 in October. Any reading above 50 suggests that the services sector is expanding.
What does it all mean?
- Did the Reserve Bank get it wrong by lifting rates yesterday – it certainly looks like it. Underpinning the anecdotal evidence that we have been hearing for some time, building approvals continue to slide. Not only are approvals below longer-term averages but the drop in approvals over the past five months is the biggest in a decade.
- Builders were already worrying where their next jobs were going to come from and clearly those risks have intensified after the latest lift in official interest rates. And the downturn is not just limited to home building with commercial construction approvals at 5-year lows. All areas of the construction sector would be rightly worried about the outlook.
- In part, higher interest rates must take the blame for the slump in home approvals. But governments, local councils and financial institutions should also share the blame. Clearly there needs to be a meeting of minds at a high level to free up the approval process, reduce the costs for developers and re-assess the financing needs and requirements imposed on investors, home buyers and developers.
- There has been a rare bit of good news for service sector businesses with the latest activity gauge pushing back above 50 and signifying that the sector is expanding for the first time in six months. But in light of the Reserve Bank rate hike, it could prove to be five minutes of economic sunshine. Clearly retailers, cafes, restaurants and service providers such as hairdressers will be under pressure in coming months as consumers trim spending levels. The main worry is that one of the key forward-looking indicators – employment – is still going backwards, and the latest rate hike may extend the trend even further.
What do the figures show?
Building Approvals:
• New dwelling approvals slumped by 6.6 per cent in September – the biggest fall in four months and the sixth straight monthly decline. Dwelling approvals are at 15-month lows and down 11.6 per cent on a year ago.
House approvals fell by 2.7 per cent in September (private sector down 2.3 per cent), the fourth straight decline. Approvals stand at 18-month lows. In annual terms house approvals are down 14.8 per cent on a year ago.
Apartment approvals fell by 13.5 per cent in September (private sector down 15.7 per cent). Approvals stand at 11-month lows. In annual terms apartment approvals are down 4.2 per cent on a year ago.
Dwelling approvals fell in all states except Tasmania in September (up 1.0 per cent). South Australian approvals fell 24.9 per cent and were followed by Victoria (down 10 per cent), Queensland (down 2.3 per cent), Western Australia (down 2 per cent) and NSW (down 1.5 per cent).
The value of building approvals fell by 3.2 per cent in September – the third straight monthly decline. The value of approvals stands at 16-month lows, down 36.8 per cent on a year ago.
Performance of Services index
- The Performance of Services index rose from 45.6 to 50.7 in October. It was the first reading above 50 – indicating expansion of activity – in six months.
- Sales, orders and employment all rose in the month, but the employment index remains below 50 at 49.4. Selling prices rose from 47.5 to 50.6 – the first reading above 50 in six months.
- The survey was taken before yesterday’s rate hike.
Average retail prices
- The Bureau of Statistics releases prices of 51 key grocery items in each capital city each quarter. On average across the capital cities, prices of 19 goods fell in price in the September quarter and 11 were cheaper than a year ago. Tomatoes were the cheapest, down 21 per cent in the quarter, followed by oranges, teabags and butter. Milk chocolate, biscuits, breakfast cereal and dishwashing detergent rose most in percentage terms in the quarter. Bananas jam and eggs are amongst the goods cheaper than a year ago.
What is the importance of the economic data?
- The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.
What are the implications for interest rates and investors?
- The outlook for construction was sombre even before the latest rate hike and it doesn’t look as though conditions will improve in a hurry. Slower construction activity will weigh on the outlook for home builders, building material suppliers and household goods retailers.
- Construction is clearly going backwards at present, joining manufacturing, tourism and some export sectors. The latest data will restrain expectations for potential rate hikes in 2011. The Reserve Bank certainly wouldn’t be encouraged by the slump in home building and may live to regret yesterday’s opportunistic rate hike.
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