The January trade surplus was much larger than expected, coming in at $1433mn.  Market consensus was looking for a surplus around $100mn (CBA (f): $200mn).  The trade balance has now been in surplus for three consecutive months, after a continuous moderation in trade deficits over HII 2013.  Rising resource exports and falling capital goods imports mean that trade surpluses are likely to continue over the near‑term.

The largest increase in exports in January was in the non‑rural goods category, driven by higher resource exports (+3.2%).  The depreciation in the Aussie dollar is positive for Australia’s key bulk commodity exports which are priced in US dollars.  Rural exports had another solid month, rising by 4.9% following a surge in wheat exports in the previous month.  In January, the rise in rural exports was concentrated in “other rural” (+6.4%) and meat exports (+11.3%).  The volatile non‑monetary gold category rose by 44.2% in January, after falling by 28% in the previous month.

The modest rise in imports was a combination of higher intermediate goods imports (+7.8%), a fall in capital goods imports (‑9.4%) and a rise in consumption goods imports (+0.7%).  The rise in intermediate imports was driven by a 6.0% lift in fuel imports.  This is a direct impact of the lower Aussie dollar lifting fuel prices.  Capital goods continue to trend lower as the construction‑intensive part of the mining story slows down.  This trend will continue over coming months.  The lower Aussie dollar looks to be having a marginal impact on redirecting offshore spending back onshore.  The historical experience tells us that this trend will become more apparent as higher import prices work their way into consumer spending decisions.

On a rolling annual sum, exports to China were 37.3% of total goods exports which is the highest level on record.  Resource exports will continue to dominate the trade story to China. But, service exports will also be an important.  Tourism is the third biggest export earner and education is the 5^th largest. The emergence of the Asian middle income consumer brings the opportunity for an increase in both goods and services exports.  History tells us that middle income consumers demand certain goods such as: larger and better quality housing; more and better quality food; and more consumer durables.  Middle income consumers also demand certain services such as education and holidays.  Education visas are rising and China and India are already the fastest growing component of the Australian tourism market.

Strong growth in resource exports is an important part of the necessary growth transition.  This week’s QIV GDP data indicated that net exports made a significant contribution to growth over the quarter.  The transition of the mining boom from investment to production phase means that resource exports will continue to make a significant contribution to growth.  As the majority of LNG projects finish construction (around 2015), there will be a significant rise in export volumes.  Thereafter, iron ore exports will move in the same direction.  Large trade surpluses are part of the scenario where we may ultimately switch from current account deficits to surpluses.

The post Trade Balance – January 2014 appeared first on AdviserVoice.

Diana Mousina

The February Board minutes contained few surprises given the release of the quarterly Statement on Monetary Policy (SMP) at the beginning of February. The RBA’s “neutral” policy bias was again evident in the wording that “the most prudent course would likely be a period of stability in interest rates”.

The general tone in the February Board minutes is that the RBA is a little more relaxed about growth prospects (both at home and abroad) and a little less comfortable with the inflation outlook. The RBA noted that there are several possible explanations for the higher‑than‑expected QIV CPI. There could be an element of “noise” that occurs in economic data, the pass‑through from a lower exchange rate could be occurring more quickly than usual, the pass‑through from slow wages growth may be occurring more slowly than usual or there may be less spare capacity in the economy than previously thought. It is likely that it is a combination of all of these factors at work.

The RBA raised their inflation forecasts for 2014, as published in the SMP, with the June 2014 forecasts now exceeding the top side of the 2‑3% target band. The higher inflation forecasts are mainly due to the effects of a weaker AUD lifting import prices. The wage price data for QIV is released on Wednesday which will be an important guide for near‑term inflation risks. We are expecting quarterly wages growth around 0.7% (2.6%pa) which is slightly above market expectations of a 0.6% increase (2.5%pa).

We see the overall inflation risks as being skewed to the high end of the RBA’s new inflation forecast ranges. The RBA is still placing weight on the idea that slower wages growth will eventually produce a step down in what has proved to be very sticky domestic inflation rates. This step down is needed to offset higher import prices flowing from a lower Aussie dollar. But we suspect that the gap opening up between wages growth and domestic inflation is an indication of structural inflation drivers at work. From a policy perspective, the RBA has to run harder against the cyclical CPI component to offset the structural CPI pressures.

The RBA’s upwardly revised GDP forecasts come from the effects of a lower Aussie dollar stimulating activity in the traded goods and services sectors, a firmer housing construction outlook and clear signs of rising mining export volumes. The minutes noted that the central bank’s outlook for the labour market was little changed. This meeting occurred before the January employment data that saw the unemployment rate rising to a 10‑year high of 6.0%. The RBA has, however, been expecting a rise in the unemployment rate. The latest January data would not have caused the RBA to change their view on the labour market. The minutes also mentioned that labour market conditions lag economic growth. The various leading indicators were more positive for economic activity around the turn of the year which is positive for the labour market. The RBA also commented on the labour force participation rate, noting that “the ageing of the population accounted for around half of the decline in the participation rate over the past few years”.

On the global outlook, the RBA appears to be broadly comfortable with the global backdrop. The risks to global growth are evenly balanced and the Bank has notched up its forecasts for Australia’s trading partner growth to 4½% in 2014 and 4% in 2015. This is a small upgrade from previous forecasts and reflects improving conditions in the advanced economies.

Our forecasts have the RBA’s “period of stability” in interest rate settings extending through to late 2014 when we expect a modest tightening cycle to get underway.

The post CBA Economics: RBA’s neutral policy bias reiterated in Board minutes appeared first on AdviserVoice.

The post CBA Economics: Rising retail trade momentum is positive for household spending growth appeared first on AdviserVoice.

• The transition from mining to non‑mining led growth is on track.  Next week’s data on housing lending, consumer sentiment, construction, employment and dwelling starts will provide further detail on the transition.
• US non‑farm payrolls could be stronger than expected.  Employment data is key for Fed tapering decisions over 2014.
• Other important US data over the week ahead are retail sales, CPI and industrial production.

Welcome to 2014! The Australian data flow has begun the new year quite positively with signals that the transition to non‑mining led growth is proceeding as loose monetary policy continues to work its way through the economy.  Our outlook for the Australian economy and financial markets for 2014 is included in the Perspective.

In Australia, housing‑related data points are expected to show that the recovery in the housing market is firmly entrenched. Total housing lending to owner‑occupiers and investors looks like it continued to increase in November, rising by around 4%.  The ABS’ QIII building activity release will detail the number of dwelling starts over the period.  We are looking for a 1% increase in commencements in QIII.  A surge in approvals towards the end of QIII and start of QIV will see stronger levels of commencements in the periods ahead.

The January reading of consumer sentiment may pick up given anecdotal evidence of solid retail sales growth over the Christmas period.  Stronger than expected retail sales data this week indicates that the period of weak retail outcomes are easing thanks to prior cuts to the cash rate and rising house prices.  Consumer unemployment expectations are likely to remain elevated while there are highly publicised news around large job losses.  The December employment report is the key release next week.  We expect modest jobs growth around 11K in the month The overall trend in employment growth has been soft.  But, despite this the unemployment rate has hovered around 5¾% due to a falling participation rate.

The engineering construction data provides additional detail on work done over the period.  The data provides useful information on mining capex and the progress of non‑residential construction, which is key for the non‑mining outlook.

New Zealand data includes the NZIER quarterly survey of Business opinion which should show a decent improvement in business confidence in line with the strengthening seen in the ANZ survey.  NZ retail card spending should show another lift, indicating a strong end to the year.  The outlook for the New Zealand economy in 2014 is included from page eight.

The Japanese current account is likely to be a deficit around ¥150bn.  This would be the third consecutive current account deficit for Japan.  The deterioration in the Japanese current account is one of the factors contributing to the depreciation in the Japanese Yen.

Tonight, the US non‑farm payrolls are expected to print around 197K, in line with recent outcomes.  The strong ADP employment report released earlier this week suggests an upside risk to December payrolls.  The unemployment rate looks like it will remain at 7.0%.  Outcomes in the labour market will be key for the Fed’s tapering decisions this year.

US advance retail sales are published next week and are expected to show a more modest rise in December following a strong outcome in the previous month.  December US CPI is expected to pick up thanks to rising fuel prices.  Annual core inflation however should stay sub 2%.  The pace of industrial production growth is expected to moderate in December given recent trends in the ISM.  The Fed also release their Beige Book which provides analytical insights into economic conditions in each Fed district and sectors of the US economy.

The only major Eurozone release is November industrial production.  The strong lift in German industrial production in November and the improvement in the Eurozone PMI suggest a bounce back  in Eurozone industrial production.  UK data includes CPI and retail sales.  UK CPI has eased recently but there may be some upward pressure over the next few months as utility prices have risen.  Retail sales growth should continue to edge higher towards its long‑run average as confidence lifts and the labour market strengthens.

The post Weekly Economic Perspective: week beginning 13 January appeared first on AdviserVoice.

The positive QIII outcome for actual business capex bettered market expectations which centred on a fall of 1.2%.  The 3.6% rise in capex over the quarter was broad‑based.  Mining capex was up 4.0% while non‑mining investment grew by 3.0%.  The data shows that mining investment is hovering around its peak, while there are tentative signs that the desired lift in non‑mining investment is beginning to occur.   Despite picking up, manufacturing investment is weak as the prolonged effects of a strong domestic currency continue to bite.

The fourth estimate of 2013/14 capex expectations was the market focus from today’s data.  Companies upgraded their expectations for capex spending in 2013/14.  The outcome makes us confident of how the transition from mining to non‑mining led growth will proceed.  Based on today’s numbers, the investment outlook looks a little stronger than that reported three months ago.  Nominal total capex looks like it will rise by around 1% in 2013/14.  This compares to the capex survey published three months ago which indicated that capex would fall in 2013/14.

Today’s data does not change our view on the mining investment story.  The fourth estimate of mining capex plans for 2013/14 came in a little better than we were expecting.  Mining investment was just under 8% of GDP in 2012/13 and we remain comfortable with our long‑held view that mining capex will plateau at a similar amount in 2013/14.  The real drag on GDP growth from falling mining capex looks to be some time away.  By this time, growth in the non‑mining economy is expected to have picked up noticeably.  The resilience in mining capex expectations indicates that the period of large project cancellations looks to have largely finished.  In our view, the mining outlook is stronger than that indicated by the RBA in its latest Statement on Monetary Policy. The RBA downgraded their 2014/15 growth forecasts based on an expectation that mining investment will fall more than previously anticipated.

The more pressing concern at the moment is how the non‑mining story will play out.  Non‑mining capex expectations for 2013/14 were the stronger part of the story today.  Non‑mining capex now looks like it will grow marginally in 2013/14.  The previous estimate indicated a 5% fall in non‑mining capex over 2013/14.  Timing is important when analysing the capex survey.  The latest capex survey was taken over October‑November.  During this time, business confidence rebounded noticeably.  The Aussie dollar appreciated in October and then fell, now trading at just over USD0.91.  Most commentators expect the Aussie dollar to move lower so it is likely that companies saw the appreciation in the currency as temporary.

We have pointed out for some time that the ABS capex survey has some limitations when assessing the outlook for non‑mining capex.  The capex survey excludes some large non‑mining sectors including agriculture, health care & social assistance and education & training.  Capital spending in these excluded industries has been robust.

We have analysed the pipeline of non‑mining work based on data from the Deloitte Access Economics Investment Monitor.  Based on this data, we have calculated that the total value of definite non‑mining capex projects that exists in the pipeline is $138bn.  This equates to just over half of the total value of definite mining projects at the moment.  This is a significant pipeline of non‑mining work that exists and should provide a significant offset to the looming “pothole” left by the end of the mining construction boom.  The first indicators of higher spending activity in the non‑mining sector will be through lending data.  Current levels of commercial finance are turning up which has historically been a good indicator of non‑mining investment activity.

Today’s figures do not alter our thinking on the outlook for interest rates.  Any further rate cuts run the risk of overstimulating the housing market without gaining the desired “rebalancing” of growth.  The RBA’s preference is for further stimulus to come via a lower Aussie dollar.  We believe that the RBA is a reluctant rate cutter and continue to see the current 2.5% cash rate as the low point in the current cycle.  We expect the RBA to remain on hold at next week’s Board meeting.

The post Capex – QIII 2013 appeared first on AdviserVoice.

CBA release the States and Territories Perspective report.

CBA Economics have just released The State and Territory Perspectives which covers the macroeconomic trends in the States and Territories.

Most economic commentary is focussed on the national outcome. But, this report digs below the surface and compares outcomes across various regions.

In this analysis, CBA outlines how the States and Territories are performing across a range of economic indicators and detail our forecasts for State outcomes.

The report is published quarterly, following the national quarterly GDP results.

Click here to view the report.

The post CBA Economics: State and Territory Perspectives appeared first on AdviserVoice.

• 

  Actual capital spending rose but still below year earlier levels.

  Actual capital spending rose by 4.0% in QII but is 2.3% below year earlier levels

• Together with yesterday’s data on building activity, business investment will have a negligible impact on QII GDP growth.
• The 3rd estimate of planned capex for 2013/14 confirms mining capex has peaked but the hoped‑for lift in non‑mining capex remains elusive.

The QII outcome for actual business capex was stronger than expected but has little direct implications for QII GDP forecasts.  The 4% rise reflected a 6.4% rise in mining capex and a modest 0.7% rise in non‑mining capex.  The data confirms that the mining capex peak has arrived and that the desired lift in non‑mining capex is yet to show in any decisive fashion.

Capital spending plans for 2013/14 were on the soft side but not exceptionally so when judged against the background of when the survey was undertaken.  The ABS survey straddles July/August, a period characterised by global growth concerns, low business confidence and elevated political concerns.

There is a wide variation within the mix of planned spending, however.  The data again fit in with the expectation of a mining capex peak.  Manufacturing plans, however, look catastrophically weak.  If realised, manufacturing investment in 2013/14 would be nearly 40% lower than the recent peak in 2011/12.  Manufacturing weakness is counterbalanced to some extent by the rest of the non‑mining sector.

The ABS Survey does have some limitations when assessing the outlook for non‑mining capex.  The RBA noted in the recent Statement on Monetary Policy, for example, that the capex survey excludes agriculture, health care & social assistance and education & training.  Capital spending in these excluded industries has been robust.   Over the three years to 2011/12 (latest available data):

• spending in those non‑mining sectors covered in the ABS capex survey fell by 8%; but
•  spending in the excluded sectors rose by 21%.

Leading indicators on these excluded sectors are a little more encouraging.  For example, non‑residential building approvals across agriculture, education, aged care and health are trending higher.

There is a pressing need to lift business capital spending outside of the resources sector.  The available data shows how far the non‑mining sector has fallen behind in its capex task.  The non‑mining capex share of GDP is at the lowest level since 1994 and the non‑mining capital stock as a share of GDP is at the lowest level since 1977.  These requirements will eventually drive a lift in non‑mining capex.  A pick up in demand and a recovery in business confidence would help.

The post CBA Economics: Mining capex peaking – non-mining capex yet to show signs of a pick-up. appeared first on AdviserVoice.