Margin expansion; Term deposits slide

Producer Prices; Private sector credit;

• The broad measure of business inflation – the producer price index (PPI), or final stage prices, rose by 0.3 per cent in the June quarter to stand 1.1 per cent higher than a year ago.
• Business margins improve: The difference between final stage and preliminary producer inflation was +2.1 percentage points in annual terms – the fourth consecutive quarter of margin expansion.
• Lending up: Private sector credit (lending) rose by 0.4 per cent in June after a 0.5 per cent gain in May. Annual credit growth fell from 6.2 per cent to 5.9 per cent.
• Term deposits held with banks fell by $6.3 billion in June to $506 billion. Term deposits are down 4.3 per cent on a year ago – the sharpest decline in 12 years. Term deposits have been regularly falling in annual terms for 18 months – the longest period in records going back almost 30 years.
  Private sector credit figures have implications for finance providers, retailers, and companies dependent on business spending.

What does it all mean?

• The latest business inflation figures should ensure policymakers don’t feel threatened by inflation. Domestic price pressures were well contained. In fact prices of domestic goods rose by just 0.3 per cent, while imported goods rose by 0.7 per cent in the June quarter – largely due to the slide in the Australian dollar.
• Interestingly the data also confirms the more upbeat trading conditions being faced by businesses. The difference between final stage and preliminary producer inflation was plus 2.1 percentage points in annual terms – the fourth consecutive quarter of margin expansion.
• Private sector credit remains healthy without being great. From an annual sense, credit growth eased from the best levels in six years. The key driver remains housing and in that context it is investor housing in particular that has driven the strength. Investor finance is up 10.7 per cent on a year ago – marking the strongest annual growth in seven years. It is clear that housing activity will continue to be the backbone of the economy over the coming year.
• The flat result for business credit is the most disappointing aspect of the result. Particularly given that it was for the month of June and followed the measures to stimulate business activity, which was released in the May federal budget. There is no doubt that businesses are still rather tentative and the key driver of future lending will be an ongoing improvement in labour market conditions, rise in business hiring intentions and lift in consumer confidence.
• The Reserve Bank Board will have a relatively simple decision next week. Policymakers are likely to discuss the improvements that have taken place across the labour market and the need to see a further depreciation of the Australian dollar but interest rates are firmly on hold.

What do the figures show?

Private sector credit

• Private sector credit (lending) rose by 0.4 per cent in June after a 0.5 per cent gain in May. Annual credit growth fell from 6.2 per cent to 5.9 per cent.
• Housing credit grew by 0.6 per cent in June after a similar rise in May. Housing credit is up 7.3 per cent on a year ago – the strongest annual growth since October 2010.
• Owner occupier housing credit rose by 0.4 per cent in May to stand 5.7 per cent higher than a year ago. And investor housing finance lifted 0.8 per cent in May to be up 10.4 per cent over the year – equalling the strongest growth in seven years.
• Personal credit rose by 0.1 per cent in June after a flat result in May. Personal credit was up 0.4 per cent over the year.
• Business credit was flat in June after a 0.4 per cent lift in May. Business credit is 4.3 per cent higher than a year ago.
• Term deposits held with banks fell for the fifth straight month, down by $6.3 billion in June to $506 billion. Term deposits are down 4.3 per cent on a year ago – the sharpest decline in 12 years. Term deposits have been regularly falling in annual terms for 19 months – the longest period in records going back almost 30 years. Term deposits are at the lowest levels in 42 months.

Producer prices

• The Producer Price Index (PPI), or final stage prices, rose by 0.3 per cent in the June quarter to stand just 1.1 per cent higher than a year ago. Of final stage prices, domestic good prices rose by 0.3 per cent while import good prices rose by 0.7 per cent in the quarter.
• The Bureau of Statistics notes that the 0.3 per cent lift in final stage prices “mainly due to rises in the prices received for petroleum refining and petroleum fuel manufacturing (+18.2%) and building construction (+0.8%)” and was “partly offset by falls in the prices received for accommodation (-8.6%) and bakery products (-6.1%)”.
• Prices of intermediate goods rose by 0.7 per cent in the quarter to stand 0.1 per cent higher over the year. Preliminary stage materials rose by 0.6 per cent in the quarter to be 1 per cent lower than a year ago.

What is the importance of the economic data?

• The producer price figures are important in flagging price pressures at an early stage. If business costs are rising, the risk is that these will be passed on in terms of higher prices of final consumer goods. The Consumer Price Index is regarded as the key gauge of economy-wide inflation.
• Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.

What are the implications for interest rates and investors?

• Financial market pricing suggests that a rate cut is a 22 per cent chance at next week’s Reserve Bank Board meeting. CommSec expects no change in interest rates for the rest of 2015.