Bill Nikolouzakis

Foreign investors play a critical role in the Australian residential property market, with the current guidelines to investing providing the right legislative framework, says Nyko Property Director Bill Nikolouzakis.

In a submission to the House of Representatives’ Standing Committee on Economics inquiry into Australia’s foreign investment policy for residential real estate, he said foreign investment helped underpin the residential construction market, especially for inner-city apartments, and as such was evidence that the system was working.

“From our experience there is a degree of misunderstanding around foreign investment in residential real estate. In our opinion, this misunderstanding, and, in some instances, the misreporting of what is and isn’t permissible in terms of foreign investment in residential property, has the potential to damage a valuable source of investment in a $4.75 trillion industry.

“What is often forgotten is that foreign nationals can’t buy existing residential property, but they can typically get approval to buy residential property in new developments so they are not competing with first home owners or anyone else for those existing properties.” [This can occur either before, during or immediately after construction.]

Mr Nikolouzakis said it was Nyko’s experience that foreign investors normally bought apartments in the larger blocks within the CBDs of Melbourne and Sydney and to a lesser extent Brisbane.

“This is a market that Nyko Property’s clients in Australia normally are not very supportive of as an investment option and are therefore not competing with foreign investors for those properties.

“We see the involvement of foreign investors (Nyko has established an office in Indonesia) in the residential property market to be completely positive from that standpoint, investing in property that is required for our cities to grow and become the cosmopolitan centres that we know work so well across the world when people live closer to their workplaces.

“In addition, it’s worth noting that the construction industry makes up 9.1% of the Australian workforce and a change in the rules for foreign investors making it more difficult for them to invest in new Australian property would be detrimental to that industry in a workforce that is already struggling with job losses in manufacturing.”

Mr Nikolouzakis said the current process appeared to be streamlined in such a way where it did not cause any roadblocks for foreign investors while giving Government the relevant information to perform checks on this investment.

“Foreign investment, operating under the right guidelines, can continue to be a valuable source of capital to enable positive social outcomes for the Australian populace.”

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State & territory economic performance report

• How are Australia’s states and territories performing? Each quarter CommSec attempts to find out by analysing eight key indicators: economic growth; retail spending; equipment investment; unemployment; construction work done; population growth; housing finance and dwelling commencements.
• Just as the Reserve Bank uses decade averages to determine the level of “normal” interest rates; we have done the same with the economic indicators. For each state and territory, latest readings for the key indicators were compared with decade averages – that is, against the “normal” performance.
• Western Australia remains the top-performing economy in the nation, but only just, ahead of the Northern Territory and NSW. NSW has been the big improver, up from fifth to third.
• The ACT has been pushed back from the third-best performing economy to sixth, behind Queensland and Victoria. There is then a gap to South Australia and another gap to Tasmania with both states still under-performing other economies.
• Western Australia comes out on top on only two of the eight criteria – retail spending and housing finance.  Western Australia is now second on three indicators, third on two indicators and seventh on unemployment.
• The Northern Territory has consolidated second place with the main improvements occurring in business investment. NSW jumped from fifth to third-best performing economy due especially to top rankings on population growth and dwelling starts.

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• Over the three months to February, employment across Australia grew by just 0.1 per cent or 16,200 – marking the slowest pace of jobs growth in 18 months.
• The weakness in housing activity resulted in the construction sector shedding 30,600 jobs in the three months to February – marking the biggest fall in 8 years. Almost all construction jobs lost were in NSW. Overall the data shows a much more mixed picture of the job market with 8 of 19 industry sectors having less jobs than three months ago.
• Across the states NSW (+26,700) led the job gains in the three months to February, followed by Victoria (+22,200). The bulk of the job losses occurred in Queensland (-39,400), and Western Australia (-14,600).
• Domestic airfares generally rose in March with business fares up 4.8 per cent, full economy fares up 0.3 per cent and restricted economy fares up 1.4 per cent.
• The discount airfare index rose by 0.9 per cent in March, easing further away from the record lows reached in January.

What do the figures show and what does it all mean?

• There is a perception that the jobs growth continues to be robust. However the latest round of quarterly labour data has clearly highlighted that employment growth is slowing. In fact over the three months to February employment grew by just 0.1 per cent, marking the slowest pace of jobs growth in 18 months. At this stage the slowdown in new labour hiring is not overly concerning especially given the strength in employment throughout 2010. However the slower pace of hiring is yet another sign that the domestic economy has lost some momentum.
• Across the sectors, the construction sector bore the brunt of the job losses with most of the weakness centred on NSW. In fact Jobs growth in the construction sector fell by over 30,000, marking the biggest fall in eight years. There is no doubt that the weakness in housing activity and slowdown in overall new building has played a significant part in slide in construction jobs. And looking forward the outlook is likely to remain weak – especially given that loans to build new homes (a timely forward looking indicator) is at the lowest levels in two years.

• Interestingly there may be more of us with jobs, but we are working far fewer hours. In fact the latest reading is just shy of record lows. On average over the past year Australians worked on average 34 hours a week. That is around 90 minutes less than a decade ago.
• The figures go a long way in explaining Australia’s poor productivity. More of us have jobs but on average we are working fewer hours. In part there are more part time workers but also more married women and seniors in the workforce on flexible hours.
• Just like anything else, when it comes to airfares it pays to shop around. According to the Government’s monitoring group, BITRE, all classes of airfares are now rising.
• Discount airfares hit rock bottom in January, and have since recorded modest gains. Interestingly the increase in prices is more a function of the increase in fuel surcharges that have taken place over the last couple of months rather than a change in consumer behaviour. The BITRE notes that fares include all taxes and charges, i.e. they reflect actual total price payable by passengers for a particular journey.
• Interestingly the gains in discount airfares have been more modest when compared with the price rise in business and full economy fares. Business class fares rose by a sizeable 4.8 per cent in March compared with discount fares which were up just 0.9 per cent in the month. Even full economy fares are now almost 6 per cent higher than a year ago while discount fares are still down 13 per cent in annual terms. Clearly the advice to shop around doesn’t just go for consumers, but also companies
• With the cost of jet fuel on the rise and upward pressure on wage costs, airlines will continue to attempt to lift fares to cover costs. At the same time airlines are testing the waters – lifting some airfares and seeing what the response is. Any smart business operator will clearly be shopping around for the best deal and trying to avoid any slug in travel costs. As to how successful they will be remains to be seen. Certainly other businesses are facing a lot of difficulties in trying to raise prices in the current environment.

What do the figures show?

Labour Industry Data

• Over the three months to February, employment across Australia grew by 16,200 or 0.1 per cent – well below the 10-year average job growth of 57,000.
• Professional, Scientific and Technical Services led the the job gains, with employment lifting by 37,300. Next strongest was Accommodation and Food Services up 44,000, with Accomodation & food service up 25,100.
• At the other end of the scale, Agriculture, Forestry and Fishing down by 39,200 in the past three months with Construction down 30,600.

• Over the past year employment has grown by 306,000 jobs or 2.8 per cent. .
• Over the year to February, Healthcare and Social Assistance (up 91,500) led the job gains, followed by Accommodation and Food Services (up 58,000) and Retail Trade (up 49,300).
• The biggest industry sector – heath care and social assistance – has been a consistent job creator over the past two years with employment only dropping once in the period. And the 91,500 jobs created over the past year was the third best result in records going back 25 years.
• Employment in the mining sector has grown sharply over the past year. Total mining employment rose by 2 per cent over the three months to February and a staggering 15.6 per cent over the year. Similarly annual growth in Electricity, Gas & Water rose by 13.6 per cent over the past year.
• Across the states in original terms NSW (+26,700) led the job gains in the three months to February, followed by Victoria (+22,200), Northern Territory (1,100) and Tasmania (700). Job losses occurred in Queensland (-39,400), followed by Western Australia (-14,600), ACT (-3,200), and South Australia (-300).

Domestic airfares:

• According to the Bureau of Infrastructure, Transport and Regional Economics, the discount airfare index rose from 64.2 to 64.8 in March (July 2003=100). In January 2011 discount airfares hit record lows of 59.4. While the index is volatile on a monthly basis, it is notable that the index has been in operation for 18 years.
• The smoothed (13-month average) index of discount airfares stood at 64.6 in March, down 6.1 per cent on a year ago. Discount airfares have been consistently falling in annual terms for over three years.
• While discount fares are falling in annual terms, business class fares are rising. The index of business class fares rose by 4.8 per cent in March. And business class fares are 3.3 per cent higher than a year ago.
• The index of full-economy fares rose by 0.3 per cent in March. Full economy airfares are up 5.7 per cent on a year ago.
• The index of restricted-economy airfares rose by 1.4 per cent in March, the tenth increase in eleven months. Restricted economy fares are up 3.6 per cent on a year ago – the fastest pace of growth in two years.

What is the importance of the economic data?

• Detailed Labour Force estimates are released the Bureau of Statistics each month with quarterly industry estimates published each quarter. The data assists in highlighting the industries which are expanding and contracting, thus providing additional insights into the current performance of the economy.
• The Bureau of Infrastructure, Transport and Regional Economics (BITRE) release data on airfares on a monthly basis. The figures are useful in getting a gauge on airline profitability. The data is also useful in monitoring consumer spending trends.

What are the implications for interest rates and investors?

• At present the Reserve Bank would not be overly concerned by the slowdown in jobs growth. In fact the central bank has also been anticipating a softening of conditions in the labour market for some months – in line with the weak growth forecasts for the first half of 2011.
• Looking forward the Reserve Bank expects the unemployment rate to only slide by 0.5 per cent over the coming two years. No doubt in the longer term an improvement in productivity and a pickup in skilled migration is what is needed to ensure that these forecasts are met. The
  jobs data gives the Reserve Bank further reason to stay on the interest rate sidelines added to which a sustained slowdown in jobs growth should ensure that wage growth doesn’t spiral out of control in the midterm.
• The latest data on airfares highlights the pressures that Corporate Australia is facing at present. Businesses will make every effort to push up prices and recoup costs. But they need to be mindful about the backlash on sales and market share. If consumers quickly shift affections when prices go up, businesses must be quick to review or reverse their decisions.

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• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 2.9 cents per litre to 139.2 cents a litre in the week to March 6 – a near 29 month high. Over the past three weeks the national average price has lifted by 4.4 cents per litre.
• Motorists are likely to see a further increase in petrol prices over the coming weeks. While the Singapore unleaded price has lifted by more than US$15 a barrel in the past three weeks, it has only partially filtered through to the terminal gate (wholesale) price – which gained 6 cents a litre in the last three weeks. CommSec expects pump prices to rise by a further 4 cents a litre in the next fortnight.
• Job market looks set to tighten further. The Advantage internet job index rose by 6.1 per cent in February. The ANZ job ads index rose by a 1.2 per cent in February after an upwardly revised 3.0 per cent rise in the prior month.
• The construction sector is still contracting despite a modest improvement. The Performance of Construction index rose by 4.4 points to 44.6 in February.

What does it all mean?

• At present petrol prices are going only one way – up. Petrol prices have surged by almost 3 cents a litre in the past week and are holding near 29-month highs and unfortunately for motorists it is unlikely to get any better over the next couple of weeks.
• The political instability in the Middle East and North Africa is the key driver of near term prices. And given the current tensions in the Middle East, the Singapore unleaded price has surged by over US$15 a barrel in the past three weeks and is holding at 30-month highs. Unfortunately for motorists the Australian dollar can only do so much, and as such most of the increase in the global oil price will need to filter through to domestic pump prices.
• The terminal gate price (wholesale) is certainly responding, lifting a sizeable six cents a litre since bottoming out three weeks ago. CommSec expects prices to increase by 4 cents a litre in the next fortnight, taking the national average price to around $1.44 a litre. At the high point of the discounting cycle petrol will be trading well above $1.50 a litre.
• The labour market has been the shining indicator over the past year and the latest job ads data suggests that employment growth is likely to be healthy in coming months. The Advantage job index has once again tracked higher after a bout of recent weakness, while the ANZ job ads series has once again shown moderate growth. Importantly while the labour market is likely to strengthen in coming months it is unlikely to see robust growth akin to 2010 – especially given that the domestic economy has lost momentum in recent months.
• The labour market will be one of the key hot issues that the Reserve Bank will be focusing on in coming months. As long as the supply of labour remains adequate, the Reserve Bank can remain on the interest rate sidelines.

What do the figures show?

Petrol prices:

• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 2.9 cents a litre to 139.2 cents a litre in the week to March 6. The metropolitan price rose by 3.0 c/l to 139.1 c/l, while the regional average price rose by 2.7 c/l to 139.3 c/l.
• Average petrol prices across states over the past week were: Sydney (up 2.1 cents to 138.7 c/l), Melbourne (up 3.5 cents to 138.7 c/l), Brisbane (up 3.0 cents to 140.7 c/l), Adelaide (up 4.8 cents to 139.5 c/l), Perth (up 3.2 cents to 138.8 c/l), Darwin (up 4.1 cents to 143.1 c/l), Canberra (up 0.3 cents to 134.0 c/l) and Hobart (up 3.1 cents to 144.1 c/l).
• Today, the national average wholesale (terminal gate) stands at a near 29-month high of 133.7 cents a litre, up 3.7 cents a litre over the past week.
• Last week, the key Singapore unleaded petrol price rose by US$4.83 (4.1 per cent) to US$123.60 a barrel – a 30 month high. And in Australian dollar terms the Singapore gasoline price rose by $4.68 (4.0 per cent) over the week to $121.88 a barrel.

Performance of Construction:

• The Performance of Construction index rose by 4.4 points to 44.6 in February. Any reading below 50.0 indicates the sector is contracting. Houses, apartments, and commercial construction were all below 50, while the engineering sector expanded after contracting in the prior month.

Job advertisements:

• The Advantage internet job index rose by 6.1 per cent in February. Job ads were strongest in the ACT (up 15.3 per cent) followed by Queensland (up 8.3 per cent), NSW (up 6.4 per cent), Western Australia (up 6.1 per cent), Victoria (up 4.9 per cent), South Australia (up 4.4 per cent), and Tasmania (up 1.5 per cent). Across sectors, gains were recorded for Transport (12.8 per cent), Administration, clerical and office support (11.4per cent) and trade services (10.3 per cent). Declines were recorded only in education (-0.8 per cent).
• Similarly the combined number of internet and newspaper job advertisements, as tracked by ANZ, rose by 1.2 per cent in February after a upwardly revised 3.0 per cent increase in January. Internet job ads rose by 1.0 per cent in the month, while newspaper job ads rose by 4.4 per cent. In annual terms job ads are up 19.3 per cent.

What is the importance of the economic data?

• Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum. National average retail prices are calculated as the weighted average of each State/Territory’s metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions.
• The monthly Job Advertisements release is a leading employment indicator. Employers only seek additional staff if business activity is strong, and more importantly, if they expect that conditions will remain favourable in coming months. It takes around 5-6 months for the new staff to be added to the payrolls. But a fall in job advertisements would have a more immediate impact on monthly employment estimates.
• The monthly Performance of Construction Index is a gauge of operation conditions across residential, commercial and engineering construction. The PCI is useful not just in showing how the construction sector is performing but in providing some sense about where it is heading. The key ‘forward looking’ components are orders and employment..

What are the implications for interest rates and investors?

• The lift in the price of petrol is further bad news for motorists, taking precious spending dollars out of consumer pockets. Retailers already have to contend with the effects of the weather on seasonal spending, consumer conservatism and higher utility prices.
• Filling up the car with petrol is the single biggest outlay that Aussie households make each week so changes in petrol prices have a big impact on the budget and spending patterns. The average household is paying almost an additional $30 a month more on petrol compared with just over six months ago.

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• Construction work done rose by 0.8 per cent in the December quarter, due solely to higher engineering activity.
• Residential building fell by 1.1 per cent in the quarter. CommSec estimates the drop in residential building will detract 0.1 percentage points from December quarter GDP growth. There is still the risk that the economy contracted slightly in the quarter.
• Commercial building slumped by 9.9 per cent in the December quarter while engineering work done lifted by 7.3 per cent.
• People are opting to stay and renovate rather than shift properties. Renovation work hit two-year highs in the December quarter.

What does it all mean?

• There is plenty of debate about a two-speed economy. Well, there is evidence that there is also a two-speed construction sector. Engineering activity – roads, bridges railways etc – continues to grow solidly. But commercial and residential building is going backwards.
• The other sobering news is that the hefty amount of outstanding projects is continuing to dry up, down for the third straight month. To be certain there is still a lot of work to be done. But the pipeline is now getting smaller, not bigger, easing some of the Reserve Bank concerns.
• If engineering is the star of the construction sector, it is renovations that are starring in residential building. The construction work figures back up other evidence showing that people are opting to stay and renovate, rather than move. While good news for builders and tradespeople, it is less positive for real estate agents.
• Commercial building is a key source of concern. Education projects are drying up, but new offices or shopping centres aren’t replacing them.
• Overall the Reserve Bank would be happy about the balance of forces in construction. The fact that engineering is pushing forward but commercial and residential building are retreating will reduce pressure on labour and materials, and reduce pressure on inflation.

What do the figures show?

• Construction work done rose by 0.8 per cent in real (inflation-adjusted) terms in the December quarter. Public sector construction work fell by 2.8 per cent while private sector activity rose by 2.4 per cent.
• Engineering work rose by 7.6 per cent in the December quarter with private sector activity up 10.2 per cent and public sector work up 2.3 per cent.
• Commercial (non-residential) building fell by 9.9 per cent with private sector work down 9.2 per cent. Residential building fell by 1.1 per cent in the quarter with private sector work down 1.0 per cent.  Alterations & additions rose 2.5 per cent but new work fell by 1.7 per cent.
• Construction work rose most in NSW (up 9.4 per cent), followed by Western Australia (up 4.1 per cent). Construction fell in the Northern Territory (down 10.0 per cent), Tasmania (down 3.7 per cent), Queensland (down 2.5 per cent), South Australia (down 2.2 per cent), Victoria (down 0.5 per cent), ACT (down 0.4 per cent).
• The value of work yet to be done fell further from record highs, down by 5.1 per cent to $41.05 billion in the December quarter.

What is the importance of the economic data?

• The Bureau of Statistics releases quarterly estimates of Construction work done. The estimates are based on a survey and cover around 80 per cent of the construction work done in the period. Revised estimates will be released in coming months. The data is useful largely for historical purposes but the work yet to be done estimates provide an early warning signal of future activity. The residential work figures give a good early guide to the strength of residential investment in the national accounts.

What are the implications for interest rates and investors?

• Conditions in the construction sector are very mixed. Had it not been for an uplift of work in NSW, construction would have fallen in the December quarter. And engineering really is the standout, whereas commercial building is weak and residential activity is patchy.
• Construction-dependent companies really need to do their homework in the current environment.
• Today’s data on both wages and construction add weight to the view that the Reserve Bank will stay on the interest rate sidelines for the next couple of months. Certainly flood-rebuilding work will be adding to the pipeline of work later in the year, but falling work levels in other sectors mean that it can be accommodated.

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• Weak consumer spending. Retail spending grew by just 0.2 per cent in December, below expectations centred on a rise of 0.5 per cent. In the December quarter, inflation-adjusted retail trade fell by 0.3 per cent – the first fall in 15 months. The measure of retail prices fell by 0.1 per cent in the quarter. Prices fell in seven of the 15 detailed sectors in the quarter.
• Books in; cafes out. Unpublished data shows that Aussies spent up big on newspapers and books in the December quarter together with hardware items and clothing. But spending on shoes was slashed while people made fewer visits to cafes & restaurants.
• Mixed signals on the job market. The Advantage internet job index fell by 0.4 per cent in January after falling 2.3 per cent in December. The ANZ job ads index rose by 2.4 per cent.
• Construction is sliding. The Performance of Construction index fell by 3.6 points to 40.2 in January – the lowest reading since July 2009.

What does it all mean?

• Over the last three months of 2010, more Aussies decided to get lost in a good book in their breaks from painting, decorating and home renovation projects. At the same time we made fewer outings to cafes & restaurants, bought fewer shoes and cut back on take-away food, toys and video games. Overall it seems that the average consumer has gone back in time to when life was simpler.
• It also seems that we are eating less – perhaps finally waking up to the obesity problem. For the second straight quarter, spending on food (in inflation-adjusted terms) has been cut with specialty retailers like butchers, bakers and fruit and vegetable shops seemingly the hardest hit.
• All the anecdotes from retailers have been spot on – we just aren’t in the mood to spend. Spending over the Christmas period was extremely weak with higher interest rates, electricity rates and petrol prices seemingly the main factors causing us to cut back.

• More and more retailers are feeling the bracing winds of deflation, or falling prices. In fact around half of retail sectors saw prices fall in the December quarter.
• The bad news is that picky consumers aren’t even being enticed by cheaper prices. Despite retail prices falling 0.1 per cent in the December quarter, spending went backwards by 0.3 per cent.
• It’s not all bad news for retailers. With the job market tight, wages rising and wealth at record highs, there are good reasons for consumers to start spending again. But it will require the Reserve Bank to take an extended period on the interest rate sidelines.
• Employment growth is showing mixed signals. The Advantage job index has tracked lower for two consecutive months while the ANZ job ads series has shown more subdued growth. Overall the result would please the Reserve Bank given its recent forecasts for a more sedate pace of growth in the labour market.

What do the figures show?

Retail trade (December month):

• Retail trade rose by just 0.2 per cent in December after lifting 0.4 per cent in November. Over the last five months, retail spending has gone nowhere. Over the past year retail trade rose by just 2.1 per cent.
• Spending fell most in South Australia and Tasmania (both down 1.3 per cent) with spending in the ACT down 0.5 per cent and Western Australian spending down 0.2 per cent.
• Sales by chain stores and other large retailers fell by 0.1 per cent in seasonally terms in December while sales by smaller retailers rose by 0.6 per cent. In annual terms sales at both chain stores and smaller retailers were up 2.1 per cent on a year ago.
• During December, sales increased most at footwear and jewellery outlets (up 3.6 per cent) followed by electrical and electronic goods retailers (up 2.5 per cent) and clothing outlets (up 2.3 per cent). Spending fell most at butchers, fruit & veg and other specialty retailers (down 3.1 per cent).

Retail trade (December quarter):

• Retail trade fell by 0.3 per cent in real (inflation-adjusted) terms in the December quarter after rising 0.5 per cent in the September quarter. Annual growth fell from 2.7 per cent to a two-year low of 1.1 per cent.
• The measure of retail inflation – the retail deflator – fell by 0.1 per cent in the December quarter after 0.7 per cent growth in the September quarter. Annual retail inflation fell from 1.1 per cent to 0.8 per cent in the December quarter. Deflation – falling prices – occurred in seven of the 15 retail sectors in the December quarter.
• In real terms, spending rose most in the quarter at newspapers & books outlets (up 6.1 per cent) but spending on footwear slumped by 8.4 per cent with visits to cafes and restaurants down 7.3 per cent.
• Compared with a year ago, newspapers & books spending is up 13.0 per cent in real terms with furniture & floor covering sales up 7.1 per cent. But at the other end of the scale spending at butchers, fruit & veg and other specialty retailers were down 9.5 per cent.

Performance of Construction:

• The Performance of Construction index fell by 3.6 points to 40.2 in January. Any reading below 50.0 indicates the sector is contracting. Houses, apartments, engineering and commercial construction were all below 50.
• The PCI is at the lowest level since July 2009 with the employment component the lowest since March 2009.

Job advertisements:

• The Advantage internet job index fell by 0.4 per cent in January. Job ads were weak in ACT (down 9.5 per cent) and Queensland (down 5.8 per cent) but strongest in Western Australia (up 5.8 per cent). Across sectors, gains were recorded for human resources (4.7 per cent), education (3.2 per cent) and sales and marketing (2.4 per cent). Declines were recorded for transport (-8.8 per cent), legal (-8.1 per cent) and tourism (-2.7 per cent).
• By contrast the ANZ job ad index rose by 2.4 per cent in January after lifting 1.2 per cent in November. But the index provides no break-up across states or industries.

What is the importance of the economic data?

• The Bureau of Statistics’ Retail trade publication contains the most current readings on the performance of consumer spending. The ABS surveys 500 ‘larger businesses’ and 2,750 ‘smaller businesses’. Retail trade covers spending at a broad range of retail outlets but excludes both petrol and motor vehicle sales. A weak retail trade result may point to a slowing economy as well weighing on the share prices of listed retail stocks. But retail trade estimates can’t be assessed in isolation – it is important to look at the influences determining future trends in consumer spending, such as income, employment and confidence levels.
• The monthly Job Advertisements release is a leading employment indicator. Employers only seek additional staff if business activity is strong, and more importantly, if they expect that conditions will remain favourable in coming months. It takes around 5-6 months for the new staff to be added to the payrolls. But a fall in job advertisements would have a more immediate impact on monthly employment estimates.
• The monthly Performance of Construction Index is a gauge of operation conditions across residential, commercial and engineering construction. The PCI is useful not just in showing how the construction sector is performing but in providing some sense about where it is heading. The key ‘forward looking’ components are orders and employment.

What are the implications for interest rates and investors?

• Day by day the Reserve Bank is being presented with more reasons to stay on the interest rate sidelines. Key sectors like manufacturing, services and construction are going backwards while deflation is taking a greater grip on the retail sector. And while retailers are cutting prices in an attempt to move stock, it seems like retailers aren’t interested.
• We just don’t know how long the current bout of consumer conservatism will last. The longer-term outlook for retailers is positive though with the job market still healthy, wages rising and wealth at record highs.
• The key issue for policy makers is to maintain a healthy labour market. As the Reserve Bank highlighted in last week’s Monetary Policy statement unemployment is forecast to only fall by about half a per cent over the next two years. A rise in productivity, weaker employment growth and a pickup in skilled migration should ensure that excessive wage growth is well contained.
• We can’t rule out the possibility that the Australian economy could experience a modest technical recession over the December 2010 and March 2011 quarters.

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• How are Australia’s states and territories performing? CommSec has attempted to find out by analysing eight key indicators: economic growth; retail spending; equipment investment; unemployment, construction work done; population growth; housing finance and dwelling commencements.
• Just as the Reserve Bank uses decade averages to determine the level of “normal” interest rates; we have done the same with the economic indicators. For each state and territory, indicators were compared with decade averages – that is, against the “normal”.
• It is clear that the ACT has the stand-out economy at present. In the ACT, unemployment is low, with housing activity, construction, population growth and economic growth all above average. The only blots on the copybook are retail spending and business investment.
• The Western Australian economy had also been an out-performer but it has slipped back to the pack. While construction work is the clear driver, population growth has slowed, dragging on the housing sector. Unemployment is low compared with other states but it has been drifting higher.
• There is little to separate Victoria, South Australia, Northern Territory, Tasmania and NSW. Certainly NSW has been a major improver over the last quarter led by above-average population growth and firmer business investment. But both the Queensland and NSW suffer from weak housing markets – the only two economies where dwelling starts are below decade averages.

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• Motorists need to prepare for higher petrol prices. The terminal gate or wholesale price of petrol leapt by over 2 cents a litre last week to 26-month highs. CommSec expects petrol prices to rise 3 cents a litre over the coming fortnight.
• Inflation is under control. The TD Securities-Melbourne Institute monthly inflation gauge rose by just 0.2 per cent in December. Excluding volatile items, prices were flat – the fifth straight month of negligible growth.
• Lending rose in November. Total lending finance rose for the third consecutive month up by 1.7 per cent in November. Lending totalled $53.2 billion in November, up 4.4 per cent over the year but up a much healthier 7.7 per cent in the past three months.
• Australian new car sales recorded a healthy rise in December. Car sales rose by 0.8 per cent in December after a 0.5 per cent rise in November. Passenger car sales rose by 4.8 per cent in the month.

What does it all mean?

• Motorists need to prepare for higher petrol prices over the next fortnight. The wholesale price of petrol leapt by almost two cents a litre last week and more than likely the higher cost will be passed through to motorists over the next 7-10 days.
• Not only has the wholesale price continued to rise but increased competition has resulted in petrol retailers selling fuel in some states at or near cost – which is clearly a unsustainable scenario in the longer term. Even on the world stage the Singapore unleaded price is holding just shy of the 27-month highs reached last week. And looking forward the fortunes of the Australian dollar will determine by just what magnitude petrol prices will rise.
• The latest TD inflation gauge suggests that inflation remains well and truly under control at present. In December price rose by just a 0.2 per cent rise. And while the annualised rate of inflation is holding at a seemingly unhealthy 3.8 per cent it is largely a reflection of higher readings in the latter part of 2009 and early 2010 than what is taking place now. In fact over the past six months inflation has been negligible and the annualised result is holding at a more sedate level of 2.6 per cent.

• Strip out volatile elements like fruit and vegetable prices, and petrol and inflation is largely non-existent in Australia. But that is no surprise – retailers of all descriptions have been telling us that is the case for some time. In the current environment businesses are trimming prices to get people to part with their cash, while the strength of the Australian dollar is working at keeping imported inflation low. Once volatile items are excluded, inflation has hardly budged over the past five months, and even the three month annualised rate of inflation is amazingly just 0.1 per cent.
• Looking forward the increase in global oil prices is likely to have a feed through effect on the inflation front. However there is not a lot that the Reserve Bank can do about changes at the petrol bowser or the floods in Queensland – a key driver of changes in fruit and vegetable prices. If underlying inflationary pressures remain contained, then the Reserve Bank can stay on the sidelines until well into 2011.
• Lending finance is effectively a forward looking indicator of economic activity – given that any rise in borrowings will eventually translate to a pickup in spending and activity. And while the conservative attitudes of consumers and businesses have kept borrowings weak, there are signs that things are thawing. Lending finance has risen for the third straight month and in annual terms the growth rate is a much healthier 4.4 per cent – marking the best result in 14-months.
• The overall improvement in lending is only in its infancy, and given the November rate hike is yet to have a full impact on the economy, the argument for a period of interest rate stability remains the best outcome. The Reserve Bank would be best served by staying on the interest sidelines – especially given that inflation looks to be well contained at present.
• The latest result on car sales is certainly encouraging, even more so given the surge in sales of passenger cars over the month of December. In seasonally adjusted terms passenger car sales recorded the best monthly increase in eight months. No doubt the strength in the labour market is the clear underlying driver in the pickup in activity. With a sustained increase in employment and resulting improvement in job security, households are once again tentatively spending on big ticket items.

What do the figures show?

Inflation gauge:

• The monthly inflation gauge rose by 0.2 per cent in December after lifting by 0.4 per cent in November. The annual rate of inflation eased from 3.9 per cent to 3.8 per cent.
• Excluding volatile items like petrol and fruit & vegetables, the inflation gauge remained unchanged after rising by 0.1 per cent in November. The annual rate of core inflation fell from 3.2 per cent to 3.0 per cent. The three-month annualised rate of inflation eased from 0.7 per cent to just 0.1 per cent.
• The trimmed mean inflation measure rose by 0.3 per cent in December. The trimmed mean measure is up 3.2 per cent on a year ago while the three-month annualised rate rose from 1.9 per cent to 2.8 per cent.
• TD Securities noted that “Contributing most to the overall change in December were price rises for automotive fuel, fruit and vegetables, and holiday travel and accommodation. These were offset by falls in prices for audio, visual and computing, sport and other recreation, and books, newspapers and magazines. The automotive fuel price increased by 4.7 per cent in December, and while the price of rent was unchanged in the month, annual rent inflation rose to 2.3 per cent, the highest reading since May 2009.”

Petrol prices:

• The national average wholesale (terminal gate) price hit a near 26-month low high of 125.5 cents a litre today. Over the past week the terminal gate price has risen by 2 cents a litre. Just over two months ago (October 1) the terminal gate price stood at an 11-month low of 111.6c/l.
• Last week, the key Singapore unleaded petrol price fell by US33 cents (0.3 per cent) to US$105.02 a barrel. And in Australian dollar terms the Singapore gasoline price fell by 66 cents (0.6 per cent) over the week to $105.40 a barrel.

Lending Finance:

• Total new lending commitments (housing, personal, commercial and lease finance) rose by 1.7 per cent in November after rising 3.3 per cent in October. Lending totalled $53.2 billion in November, up 4.4 per cent over the year but up a much healthier 7.7 per cent in the past three months.
• All housing finance (owner occupier & commercial) rose by 1.1 per cent in November, the third straight monthly gain.
• Commercial finance rose by 1.0 per cent in November. Within commercial commitments, fixed lending rose by just 3.8 per cent but revolving credit slumped by 4.9 per cent. Commercial loans are up 11.1 per cent on a year ago.
• Personal finance rose by 2.2 per cent in November, only the second rise in five months. Within personal commitments, fixed lending rose by 2.0 per cent while revolving credit rose by 2.5 per cent. Personal loans are up 9.2 per cent on a year ago.
• Within fixed lending, all categories are higher than a year ago except residential blocks of land (down 19.5 per cent).
• Lease finance rose by 0.5 per cent in November and loans are up 13.7 per cent over the year.

New car sales

• New car sales rose by 0.8 per cent in December after rising by 0.5 per cent in November.
• Passenger car sales rose by 4.8 per cent in the month, sports utility vehicles fell by 10.7 per cent while “other” vehicles (trucks, utes etc) were up 3.1 per cent. In annual terms “other” vehicle sales were down 24.8 per cent on a year ago.
• In rolling annual terms, 235,285 SUV’s have been sold in the 12 months to December. However SUV sales are down 7.6 per cent on a year ago.

What is the importance of the economic data?

• The TD Securities/Melbourne Institute Monthly Inflation Gauge is designed to “provide a timely and accurate monthly measure of inflation in Australia”. The Bureau of Statistics only releases the Consumer Price Index on a quarterly basis.
• Lending Finance is released monthly by the Bureau of Statistics and contains figures on new housing, personal, commercial and lease finance commitments. The importance of the data lies in what it reveals about the appropriateness of interest rate settings, confidence and spending levels in the economy.
• Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum. National average retail prices are calculated as the weighted average of each  State/Territory’s metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions.
• 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.

What are the implications for interest rates and investors?

• Inflation is under control at present but some of the volatile elements like petrol and fruit and vegetable prices are starting to move higher. This complicates the situation for the Reserve Bank. While the Reserve Bank can’t lift rates to respond to factors outside its control, the risk is that higher inflation may become entrenched, with businesses using the higher inflation base to justify price increases.
• The lift in the price of petrol is further bad news for motorists, taking precious spending dollars out of consumer pockets. Retailers already have to contend with the effects of La Nina on seasonal spending, consumer conservatism and higher utility prices.

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• Lending to build new homes was flat in October. A key leading indicator for home construction barely moved in October – ahead of the November rate hike. Loans for the construction of dwellings rose by just 0.1 per cent in October – only the second increase in a year.
• First home buyers exit. The proportion of first home buyers in the market hit six-year lows in October.
• Home loans rose ahead of the November rate hike. Overall, the value of housing loans rose by 2.2 per cent in October with the number of loans to owner occupiers up 1.9 per cent. But the number of home loans is 20.6 per cent lower than a year ago.
• Actual loans advanced hit 8-month lows: Lending commitments that were actually advanced in October hit eight month lows of $12.5 billion in October and were 17.6 per cent lower than a year ago.

What does it all mean?

• Blind-sided by the Reserve Bank’s preoccupation on the terms of trade, some analysts can’t believe that the Australian economy barely grew over the September quarter. Still, if you run through all the evidence, probably the big surprise is that the economy grew at all. Key sectors of the economy such as services and manufacturing are going backwards and certainly the housing market is very much becalmed. And that clearly is in evidence with the latest home loans data.
• For the home construction market one of the key forward-looking indicators is lending for construction of homes and apartments. And the latest news is not good. Lending grew just 0.1 per cent and this negligible increase was only the second monthly gain in a year.
• It’s important to note that the latest home loan data is for October – that is, it precedes the double-whammy rate hike in November. The bottom-line is that lending for home construction was already weak ahead of the last rate hike. So an extended period of interest rate stability will be required to breathe life into the home construction market.
• The number of loans to people wanting to live in homes, rather than invest in them, encouragingly grew in October. However the key question is how many budding buyers were merely attempting to lock in finance ahead of an expected rate hike.
• What is being measured in the home loan data is new commitments made to borrowers. But while a lender may make a commitment, the borrower may end up not proceeding with the loan. That has certainly been happening in recent months with the value of loans actually advanced at eight-month lows. And given the double-whammy rate hike in November, there is a greater chance that budding buyers will let the lending commitment lapse.

What do the figures show?

Housing Finance

• The number of new owner-occupier housing loans edged further away from 9-year lows in October, lifting by 1.9 per cent to 49,307 new commitments. The number of loans is 20.6 per cent lower than a year ago.
• Loans for the construction of homes rose by just 0.1 per cent in October, only the second rise in 12 months. Loans for the purchase of established dwellings (ex refinancing) rose by 1.8 per cent, while loans for the purchase of newly erected dwelling rose by 9.4 per cent after falling by 2.6 per cent in September. Refinancing commitments were higher by 2.4 per cent.
• Loans rose in five of the eight states and territories in October. Lending rose the most in Queensland (up 3.6 per cent) but fell most in Northern Territory (down 22.2 per cent). Loans also fell in Western Australia (down 0.9 per cent) and South Australia (down 0.8 per cent).
• The value of new housing commitments (owner occupier and investment) rose by 2.2 per cent in October. Owner/occupier loans rose by 2.8 per cent while investment loans rose by 1.1 per cent.
• The value of loan commitments actually taken up fell by 2.4 per cent in October to an eight-month low.
• The proportion of first home buyers in the market hit a six-year low of 15.4 per cent of all lending in October – well below the record high of 28.5 per cent set in May 2009. Fixed rate loans accounted for 6.9 per cent of all loans, up from 4.4 per cent of loans in September and 3.4 per cent of loans in August. And the average home loan across Australia stood at $286,500, up 5.3 per cent on a year ago.

What is the importance of the economic data?

• 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?

• The latest figures on home lending further raise questions about the validity of the Reserve Bank rate hike in November. Still that is old news now. The important thing is that rates were kept on hold yesterday. And the good news is that the Reserve Bank Governor is signalling an extended period of interest rate stability. Certainly we believe that the RBA will need to stay on the sidelines until well into 2011 if budding home builders become more confident to advance their plans.

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• The Government’s commodity forecaster has lifted its crop forecasts. ABARES has lifted its forecast for the 2010/11 winter crop by 6.2 per cent. Despite dry conditions in the west and floods in the east, ABARES tips a record wheat crop with production up 22 per cent on a year ago.
• Construction is contracting, joining the services and manufacturing sectors. All the key sectors in the economy are estimated to be going backwards at present. The Performance of Construction index fell by 1.8 points to 42.2 in November, below the 50 reading that separates expansion from contraction.

What does it all mean?

• Despite the over-abundance of rain in recent weeks, the Government’s chief commodity forecaster still believes that Australia will produce a record wheat crop this year. Unfortunately quality will be downgraded, affecting returns to farmers, but in a macro perspective the bumper crop is positive for rural Australia. The key issue for many farmers over the next few weeks, however, is for conditions to become dry enough to get the crop off.
• As always, conditions are far from uniform. Grain producers in the east are benefiting from the rain, but in the west the lack of rain means that the harvest could be half that of a year ago.
• Certainly the outlook for the summer crop is decidedly positive with cotton and rice farmers to be amongst the key beneficiaries of the big wet.
• Overall there will be more money in the rural economy over the coming year, courtesy of the breaking of the drought. Drought in the west and floods in the east mean that not all will share the gains. But in aggregate, income levels will be higher, boosting the outlook for retail, manufacturing and services businesses in regional centres.
• The construction sector is facing challenging conditions and all areas of government are seemingly showing no interest in addressing fundamental issues. Planning, zoning, regulation and costs are all key issues for builders and construction companies at present and serving as road blocks to higher activity levels. The Performance of Construction sector has only produced a handful of positive readings over the past two years and conditions are getting worse, not better.

What do the figures show?

ABARES Crop Report:

• The Australian Government’s commodity forecaster, ABARES, has lifted its forecast for 2010/11 winter crop production by 6.2 per cent to 43.1 million tonnes (Mt). The crop is now seen 21.7 per cent higher than 2009/10. Downgrades were applied to Queensland and Western Australian production and upgrades to other states.
• ABARES has also lifted its forecast for summer crop production by 21.6 per cent to 4.6Mt. Production of the summer crop in 2010/11 is expected to be the highest in nine years. Cotton production is tipped to soar by 130 per cent with rice production almost four times higher than the previous year at 802Kt.
• ABARES expects that wheat production will hit a record high of 26.8Mt in 2010/11, up 22.4 per cent on the previous year. Barley production is estimated to rise by 24.1 per cent to 9.8 million tonnes and canola production is estimated at 2.0 million tonnes, 6.6 per cent higher than last year.
• Exports of coarse grains in 2010/11 are tipped to rise by 23 per cent to 6.5Mt with wheat exports tipped to rise 8.5 per cent to 16Mt.

Performance of Construction index:

• The Performance of Construction index fell by 1.8 points to 42.2 in November. Any reading below 50 indicates that the sector is going backwards.
• All key sectors had activity readings below 50 with apartments at the lowest levels in 16 months. Only engineering improved in November but the reading of 39.4 was still well below the 50 line.
• Profitability is under significant pressure with selling prices sliding 11.7 points to 43.4 and input prices down only 0.9 points to 75.4.

What is the importance of the economic data?

• ABARE releases its Crop Report four times a year. The report contains the latest estimates of crop conditions, yields as well as expected exports. The information is useful in gauging the health of the rural sector.
• The Performance of Construction index is released monthly and provides a guide to operating conditions across the sector including residential, commercial and engineering construction.

What are the implications for interest rates and investors?

• The Reserve Bank has plenty to digest at present – droughts, floods, a mining boom and the conservative mindset of consumers and businesses. Now is certainly the time for interest rate stability.
• Our CBA equity analysts indicate that main beneficiary of the excess rainfall is Ridley Corporation (RIC), “which will now have an abundant supply of feed quality grain for milling yet global grain prices remain strong so RIC’s milling margins do not appear under pressure”. Ridley Corp is the preferred stock of CBA Equity Research in the Food & Agribusiness sector.
• Of other stocks in the sector the analysts note:
  • “GrainCorp (GNC) now appears likely to have FY11 grain receivals around the lower end of guidance (10- 13Mt).
  • PrimeAg (PAG) may be affected by flooding in the Emerald region but has good conditions for its cotton crop.
  • Goodman Fielder (GFF) has started buying its milling wheat (for flour milling by Allied Mills) for the second half of 2011 and the 2012 financial year and will face materially higher input costs as the spread between milling wheat and feed quality wheat widens.”

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