Housing boom; Confidence slides; China rebound

Consumer confidence; New car sales; Dwelling starts; Chinese economic data;

• Consumer sentiment: The Westpac/Melbourne Institute index of consumer confidence fell by 3.3 per cent in July to 92.2. The confidence index is down 2.8 per cent on a year ago. A reading of 100 is the dividing line separating optimism from pessimism.
• New vehicle sales rose by 3.8 per cent in June and were up 4.0 per cent on a year ago.
• Chinese economic data: The Chinese economy grew at a 7.0 per cent annual pace in the June quarter, the slowest growth rate in six years. Encouragingly the economy grew by 1.7 per cent in the June quarter, up from 1.3 per cent in the March quarter and above the forecast estimate of 1.6 per cent.
• Retail sales rose at a 10.6 per cent annual rate in June (10.1 per cent in May). The result was better than forecasts (+10.2 per cent).
• Dwelling starts rose by 8.6 per cent in the March quarter to 53,901. Work started on a record 203,760 new dwellings over the year to March, up 15.6 per cent on the previous year. 

What does it all mean?

• A mixed bag of economic data. Strength in car sales, record dwelling commencements, and better than expected Chinese data was tempered by a further drop in consumer confidence to seven-month lows. To some degree the drop in confidence was expected. The Greek debt crisis and resulting collapse in the Aussie dollar to fresh six-year lows dominated headlines last week and would have been front of mind when the survey was completed.
• Looking forward the improvement in the global outlook and a fundamentally healthy domestic economic outlook is likely to result in consumer sentiment bouncing from here.
• The latest data on dwelling starts confirms that work has begun on building over 200,000 new homes. After under-building for most of the past few years, Australia is getting the housing stock it needs. The increase in home building is powering along a raft of industries and regions across the country. At the same time, the extra homes are adding to housing supply, thus keeping downward pressure on rents and home prices.
• The only downside would be if there was massive over-building. And given that developers and investors can’t get finance for new developments unless there is near 100 per cent pre-commitments, any over-building will be isolated to a small number of regions and more of an “indigestion” problem than chronic over-building.
• There were encouraging signs in the latest round of Chinese data. Quarterly growth rebounded from 1.3 to 1.7 per cent. While retail sales, fixed asset investment, and industrial production all posted ahead of forecasts.
• Some investors might focus on the annual growth rate holding at a six-year low. However it is important to realise that the Chinese economy will grow at a slower pace in coming years as the economy gets bigger and matures. That is a given. All economies have followed that path as they have industrialised. The important point is that the composition of growth becomes more balanced over time with household spending being a bigger driver as the benefits of industrialisation are spread across the Chinese people.
• Certainly there are clear signs that the Chinese economy is seeing slower growth rates across an array of sectors. But importantly inflation remains contained and asset bubbles are not a significant threat. The key for Chinese authorities is to ensure that growth remains robust enough to create employment. At present the jobs growth in the fast expanding services sector is being offset by jobless in manufacturing.
• The Reserve Bank would be disappointed in the slide in confidence and would be hoping for a rebound. Rates have been cut twice this year, the Federal Budget was rather tame and the resulting lift in confidence has fast disappeared. The key will be for a lift in business investment plans which would support the broader growth story while building future capacity in the economy. CommSec expects interest rates to stay on hold in coming months.

What do the figures show?

Consumer sentiment:

• The Westpac/Melbourne Institute index of consumer confidence fell by 3.3 per cent in July to 92.2. The confidence index is down 2.8 per cent on a year ago.
• The current conditions index fell by 4.3 per cent in July, while the expectations index fell by 2.3 per cent.
• Three of the five components of the index fell in July:
  • The estimate of family finances compared with a year ago was down by 10.4 per cent;
  • The estimate of family finances over the next year was up by 6.9 per cent;
  • Economic conditions over the next 12 months was down by 10.5 per cent;
  • Economic conditions over the next 5 years was down by 4.4 per cent;
  • The measure on whether it was a good time to buy a major household item was up by 0.2 per cent.
• Gender & demographics: Men (index reading of 94.0, down 1.4 per cent) are more optimistic than Women (90.6, down 5.0 per cent). Young people (18-24 years) are more optimistic than other demographics; the index was up 11.0 per cent to 100.7. Across the other demographics: 25-44 years (index 93.0, down 1.8 per cent); 45 years plus (index 90.6, down 6.2 per cent).
• State sentiment levels: NSW (down 12.2 per cent), Victoria (up 2.6 per cent), Queensland (up 2.3 per cent), Western Australia (up 15.5 per cent) and South Australia (down 12.9 per cent).

New Vehicle Sales

• According to the Australian Bureau of Statistics (ABS) new motor vehicle sales rose by 3.8 per cent in June and were up 4.0 per cent on a year ago. Passenger car sales rose by 5.4 per cent in June; sales of “other” vehicles (includes utilities, panel vans, cab chassis, goods carrying vans, rigid trucks, prime movers, non-freight carrying trucks, and buses) rose by 1.1 per cent; and sales of sports utility vehicles rose by 3.3 per cent.

Dwelling starts

• Dwelling starts (commencements) rose by 8.6 per cent in the March quarter to 53,901. New private sector house approvals rose by 0.2 per cent and private sector apartment starts rose by 19.7 per cent. Work started on a record 203,760 new dwellings over the year to March, up 15.6 per cent on the previous year.
• Across Australia, starts in the March quarter fell in all states except the ACT (down 14.5 per cent), South Australia (down 4.2 per cent), and Western Australia (down 0.3%). Starts across other states & territories: NSW +0.6 per cent; Victoria +5.4 per cent; Queensland +6.4 per cent; Tasmania +5.2 per cent; Northern Territory +2.9 per cent.
• In the year to March, dwelling starts were higher than the decade average in all the states & territories except for Tasmania. Starts were at record highs in Victoria (61,907).
• Dwelling starts in NSW in the March quarter were 44 per cent above the decade average.

Chinese economic data

• The Chinese economy grew at a 7.0 per cent annual pace in the June quarter, the slowest growth rate in six years, and matched annual growth rate in the March quarter. The economy grew by 1.7 per cent in the June quarter, up from 1.3 per cent in the March quarter and above the forecast estimate of 1.6 per cent.
• Industrial production rose at a 6.8 per cent annual rate in June, above the forecast average (6.0 per cent).
• Crude steel production fell by 0.8 per cent in June compared with a year ago.
• Retail sales rose at a 10.6 per cent annual rate in June (10.1 per cent in May). The result was better than forecasts (+10.2 per cent).
• In real terms, spending was up 10.6 per cent in June on a year ago (+10.2 per cent in May).
• Sales of telecom equipment rose at a 34.4 per cent annual rate in June with building materials up 18.0 per cent, furniture up 18.5 per cent, and home appliances up 10.2 per cent.
• Urban investment rose by 11.4 per cent in the six months to June compared with a year ago. The result was above forecasts of an 11.2 per cent increase and in line with 11.4 per cent growth recorded for the in the first five months of 2015.

What is the importance of the economic data?

• Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.
• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10^th of each month. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.
• The Australian Bureau of Statistics (ABS) provides monthly estimates of car sales in seasonally adjusted and trend terms after receiving the actual sales data from the car industry. The figures highlight the strength of consumer spending as well as conditions facing auto & components companies.
• The Australian Bureau of Statistics releases data on dwelling commencements (starts) each quarter. The figures provide guidance on future construction activity. If construction begins on new houses or apartments, it signifies work for building trades.

What are the implications for interest rates and investors?

• The low rate environment will continue to support confidence and activity levels over the medium term. The home building boom is serving to lift a raft of boats. Architects, carpenters, building material suppliers, hardware and homemaker stores are just some of the areas benefitting from the building boom.
• CommSec expects no change to interest rate settings in coming months.
• When it comes to China it shouldn’t be forgotten that the world’s second largest economy of 1.3 billion people is still growing at 7 per cent each year – an impressive achievement.