Best business conditions in almost a decade

From

Housing Finance; NAB Business survey; Consumer Sentiment

  • Business survey: The NAB business conditions index rose from +10.9 points to a 9½-year high of +15.1 points in June. The business confidence index rose from +7.5 points to +9.3 points.
  • Home loans: The number of loans (commitments) for budding home owners (owner-occupiers) rose by 1.0 per cent in May. The value of all home loans rose by 1.3 per cent in the month.
  • More loans cancelled: The value of home loan commitments that were cancelled in May rose 16.9 per cent to a 10-month high of $1.44 billion in May.
  • Consumer confidence: The weekly ANZ/Roy Morgan consumer confidence rating fell by 1.5 points (1.3 per cent) from a 12-week high of 114.5 to 113.0 in the week to July 9. Confidence is down 1.9 per cent over the year although near the average of 113.1 since 2014.

What does it all mean?

  • Aussie businesses are enjoying the best operating conditions in almost a decade. And they are loving it. Interestingly though, the favourable conditions have been accompanied by a lift in key inflation indicators. The good news for consumers is that businesses have noted an upturn in labour costs – growing at the fastest pace in 3½ years. If the better business conditions lead to higher employment and wages then consumers may start cheering as well.
  • While consumer sentiment eased last week, this was still the second best reading in the past three months. And the good news for retailers is that consumers believe that it is a great time to buy a major household item like a TV or furniture.
  • The home loan data had the right mix in May – more loans to budding home owners and fewer loans to investors. It is also important to remember that lenders may agree to provide finance to buy a home but borrowers may not take up the offer. Loans committed but not advanced remain high and cancelled loans are also rising. More budding property owners are getting cold feet and not going through with the deal.

What do the figures show?

Housing finance – number

  • The number of loans (commitments) for budding home owners (owner-occupiers) rose by 1.0 per cent in May after falling for the three previous months. The number of new home loans was down by 3.5 per cent on a year ago.
  • But excluding the refinancing of dwellings, the number of loans was down by 0.1 per cent in May.
  • Loans by owner-occupiers for the construction of homes rose by 2.4 per cent in May to a 25-month high.
  • Loans to buy newly-erected dwellings rose by 3.7 per cent after falling 2.2 per cent in April.
  • Loans for the purchase of established dwellings (excluding refinancing) fell by 1.0 per cent in May.
  • The number of refinancing transactions rose by 3.6 per cent – the first gain in four months

Housing finance – value

  • The value of new housing commitments (owner occupier and investment) rose by 1.3 per cent in May. Owner-occupier loans rose by 2.9 per cent and investment loans fell by 1.4 per cent.
  • The value of loans by owner-occupiers and investors to build new homes fell by 2.7 per cent in May after rising by 2.6 per cent in April and rising 2.3 per cent in March. The value of loans stood at $2.94 billion, only modestly down from the record high of $3.31 billion in the year to March 2016.

Housing finance – other statistics

  • The value of cancelled loans rose 16.9 per cent to a 10-month high of $1436.3 million in May. Loans that have been committed but not advanced rose by 3.1 per cent to $27.5 billion.
  • The proportion of first-time buyers in the home loan market rose from 13.8 per cent to a 22-month high of 14.0 per cent in May (long-term average 19.4 per cent).
  • The proportion of fixed rate loans rose from 16.6 per cent to a 42-month high of 17.3 per cent in May. And the average home loan across Australia stood at $380,000 in May, up $8,100 in the month and up 7.0 per cent on a year ago.

Consumer sentiment

  • The weekly ANZ/Roy Morgan consumer confidence rating fell by 1.5 points (1.3 per cent) from a 12-week high of 114.5 to 113.0 in the week to July 9. Confidence is down 1.9 per cent over the year although near the average reading of 113.1 that has held since 2014.
  • Three of the five components of the index fell in the latest week:
    • The estimate of family finances compared with a year ago was up from +4 to +5;
    • The estimate of family finances over the next year was down from +22 to +21;
    • Economic conditions over the next 12 months was down from zero to -6;
    • Economic conditions over the next 5 years was down from +6 to +4;
    • The measure of whether it was a good time to buy a major household item was up from +40 to +41:
  • The reading of inflation expectations two years ahead was steady at 4.3 per cent in the latest week. Inflation expectations have now held above 4 per cent for the past 30 weeks.

National Australia Bank Business Survey:

  • The NAB business conditions index rose from +10.9 points to a 9½-year high of +15.1 points in June (long-term average +5.1 points). The business confidence index rose from +7.5 points to +9.3 points (long-term average +5.8 points).The survey was conducted from June 26-30.
  • Components: the index of trading conditions rose from +14.8 points to +21.5 points; employment was steady at +7.0 points; profitability rose from +10.2 points to +15.5 points; forward orders rose from +3.2 points to +4.3 points.
  • Inflationary indicators were up in June. The monthly reading of labour costs rose at a 1.2 per cent quarterly rate in June after a 1.0 per cent rise in May. Purchase costs rose at a 0.8 per cent quarterly rate in June after a 0.5 per cent increase in May. Final product prices were up by 0.5 per cent in June after a 0.4 per cent gain in May. And retail prices rose by 0.5 per cent in June after falling 0.1 per cent in May.
  • Capacity utilisation fell from a 9-year high of 82.5 per cent to 81.9 per cent in June – still well above the long-term average of 81.0.
  • The proportion of firms reporting that they did not require credit lifted from around 52 per cent in May to 70 per cent in June.

What is the importance of the economic data?

  • The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.
  • The monthly National Australia Bank business survey is valuable in providing a timely reading about the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.
  • Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.

What are the implications for interest rates and investors?

  • Investors always question the veracity of economic data. But the NAB business survey relies on actual businesses filling out forms and reporting on their experiences. And these businesses are saying that operating conditions are at the best levels in almost a decade. But the thing to watch is a noticeable uptick in price pressures.
  • There are signs of more balanced conditions in the housing market. But it will be important to see the post June data when the incentives to first home buyers kicked in.
  • Despite the fact that official rates are solidly on hold, around 17 per cent of home loans are fixed loans – the highest proportion in almost four years. Borrowers no doubt believe they are locking in at the lows – and this is hard to disagree with.
  • CommSec still expects no change to interest rates in the foreseeable future but the NAB survey needs to be closely watched.

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