• 

  Interest rates on the move?

  The Reserve Bank Governor has delivered a speech at the Anika Foundation in Sydney. The Reserve Bank Governor has provided the clearest message yet that while super low interest rates are providing a boost to the economy, there is “no impediment to further easing if needed”. The inflation data last week has not changed the central bank’s views on the scope for further rate cuts.

• The tone and comments from the speech is consistent with CommSec’s view that the cash rate will be cut by 25 basis points next Tuesday. The Aussie dollar fell from US91.60c to US90.80c during the speech.
• Dwelling approvals consolidate: Dwelling approvals fell by 6.9 per cent in June after falling by a revised by 4.3 per cent in May (previously a 1.1 per cent fall). Approvals are down 13.0 per cent over the year.
• House approvals are down 1.3 per cent in June (private sector down 1.2 per cent). ‘Lumpy’ apartment approvals fell by 15.2 per cent in June.

What does it all mean?

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• Retail trade: Retail spending fell by a surprising 0.8 per cent in July after lifting by 1.2 per cent in June. Annual spending growth fell from 5.3 per cent to 3.5 per cent. Sales fell across all eight states and territories. The biggest drop in spending occurred at “Department stores” down 10.2 per cent in July – marking the biggest monthly slide in over seven years.
• Inflation: The TD Securities-Melbourne Institute monthly inflation gauge rose by 0.6 per cent in August after no change in prices over the following three months. Excluding volatile items, the inflation gauge rose 0.2 per cent in August.
• Bad news for job seekers: The number of job advertisements fell for the fifth straight month, dropping by 2.3 per cent in August to stand 9.6 per cent lower for the year.
• Profits slump: Company profits for the third straight quarter, dropping by 0.7 per cent in the June quarter to stand 6.5 per cent lower than a year ago.
• Manufacturing up: The Performance of Manufacturing index rose by 5.0 points to 45.3 in August. Still, it was the sixth month below a reading of 50 points, suggesting contraction in the sector.
• Home prices track sideways: The RP Data – Rismark Home Value Index reported that capital city home prices were flat in August after rising by 0.6 per cent in July. Home prices rose by 1.6 per cent in the past three months but are still down 2.4 per cent on a year ago.
• Fuel prices: According to the Australian Institute of Petroleum, the national average retail petrol price fell from 13-week highs, down by 1.8 cents to 144.0 cents a litre in the past week. CommSec tips prices to fall by 1-2 cents a litre over the coming fortnight.

 To read the full report, click here.

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• Mining investment rose by 10.0 per cent while manufacturing spending fell by 3.8 per cent and spending by other industries fell by 4 per cent. Investment spending rose in four of the eight state/territory economies.
• The third estimate of investment for 2012/13 was $181.533 billion, up 4.7 per cent on the second estimate. This was the weakest upgrade in 19 years. Expected spending is up 20.8 per cent on a year ago.
• Dwelling approvals slump: Dwelling approvals slumped by 17.3 per cent in July – the third fall in four months. House approvals rose by 1.6 per cent while ‘lumpy’ apartment approvals fell by 40.5 per cent.

What does it all mean?

• The latest economic data is a literal dog’s breakfast. Business spending was up, but dominated by mining. Investment plans are healthy but cracks are appeared. And residential building remains in the doldrums.
• The Reserve Bank certainly has some work on its hands to disentangle the various parts of the economy. Mining states remain in strong shape, but non-mining states aren’t investing or building new homes. Clearly the Reserve Bank needs to keep rate cuts on the agenda.
• The mining states have still plenty of work to go on with. But the same can’t be said for non-mining states and industries. Investment in the manufacturing sector and service industries has now fallen for three straight quarters.
• Cracks are starting to appear in the investment outlook. Usually investment plans lift by around 11 per cent at this time of the year. But the upgrade was only 4.7 per cent – the weakest upgrade in almost 20 years. The resource boom may not be ending, but more businesses are re-assessing spending plans.
• In terms of residential building, it has been all said. Federal, state and local governments must come up with an action plan.

What do the figures show?

• Business investment (spending on buildings and equipment) rose by 3.4 per cent in the June quarter, in line with forecasts. Spending on buildings rose by 4.8 per cent in the quarter while spending on equipment lifted by 1.2 per cent. Investment is up 27.4 per cent with buildings up 45.2 per cent and equipment up 5.7 per cent.
• Mining investment rose by 10.0 per cent while manufacturing spending fell by 3.8 per cent and spending by other industries fell by 4 per cent.
• Investment fell in four of the eight states and territories in the June quarter. The biggest increase was in the Northern Territory (up 56.7 per cent), followed by ACT (up 14.9 per cent), Western Australia (up 9.5 per cent), and Queensland (up 6.2 per cent). Spending fell most in Tasmania (down 10.6 per cent) followed by South Australia (down 3.3 per cent), NSW (down 3.0 per cent) and Victoria (down 2.4 per cent).
• The overall deflator for investment goods rose by 0.6 per cent in the June quarter. The cost of buildings and structures rose by 1.2 per cent while the cost of equipment fell by 0.8 per cent.
• Over the year, the cost of investment goods rose by 1.6 per cent. The cost of buildings rose by 2.0 per cent while the cost of investment equipment fell by 1.6 per cent.
• In 2011/12 investment totalled $158.088 billion, up 29.9 per cent over the year.
• The third estimate of investment for 2012/13 was $181.533 billion, up 4.7 per cent on the second estimate and the softest upgrade since 1993/94. But expectations are still up 20.8 per cent on a year ago.
• Dwelling approvals slumped by 17.3 per cent in July – the third fall in four months. House approvals rose by 1.6 per cent while ‘lumpy’ apartment approvals fell by 40.5 per cent.
• Dwelling approvals fell in all the six states in July. Victoria led the falls with approvals down by 29.4 per cent followed by Queensland (down 19.7 per cent), NSW (down 9.4 per cent), Western Australia (down 4.8 per cent), Tasmania (down 4.5 per cent) and South Australia (down 1.4 per cent).
• The value of all commercial and residential building approvals fell by 19.5 per cent in July after slumping by 18.5 per cent in June. Residential approvals fell 21.1 per cent with commercial approvals down 17 per cent.

What is the importance of the economic data?

• “Private New Capital Expenditure and Expected Expenditure” is released quarterly by the Bureau of Statistics. The figures show both actual and expected spending by businesses on tangible assets such as new buildings, machinery and office equipment. The figures are obtained after sampling 8,000 private business units.
• The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.

What are the implications for interest rates and investors?

• Activity in the mining sector will remain firm for some time yet. But outside the mining sector, businesses remain cautious and refuse to invest. The Reserve Bank may have more to do in cutting rates.
• If global economies stabilise and consumers spending again then businesses may get their mojos back. Certainly businesses are cashed up and it is likely that commercial vacancy rates will fall in coming years due to the lack of building.
• The firm Aussie dollar is acting to support equipment investment by firms and spending should lift in the September quarter with Government assistance payments to small businesses.

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• Non-food retailing rose by 0.9 per cent in May to be 3.4 per cent higher than a year ago – marking the biggest annualised gain in nearly two years.
• Spending rose most at electrical and electronic stores up 1.8 per cent. Healthy gains were recorded for cafes, restaurants and takeaway food as well as newsagents and bookstores. Footwear and Liquor store sales also received a boost. The biggest drop in spending was at supermarkets.

What does it all mean?
Despite criticism in some quarters, the government handouts have paid dividends. Retailers enjoyed a much needed boost to sales in May with sales up 0.5 per cent. And more importantly the $2.3 billion that the Federal Government distributed in May and June, coupled with tax cuts to low and middle income earners, will support a further improvement in activity in coming months.

The windfall one-off assistants payments allowed consumers to accelerate planned purchases that they would have been saving for, and electrical, computer and technology stores were the lucky recipients. Spending at electrical retailers rose by a healthy 1.8 per cent – marking the second best result since December 2010. In addition department stores, cafes & restaurants and even newsagents and bookstores recorded a healthy increase in activity.

Interestingly without the fiscal stimulus, total sales may have posted a much more anaemic 0.1-0.2 per cent result for May. Granted the half a per cent rate cut in May would have provided a modest boost to confidence but it would not have had a material impact on household budgets. The impact of the rate cuts should also support activity over the medium term.

The better than expected retails sales result resonated across most of the states with the exception of Tasmania, South Australia and the ACT. And in annual terms the mining states continue to be enjoying the large slice of activity. Retail sales across Western Australia stood 10 per cent higher than a year ago, while sales in the Northern territory were up over 5 per cent compared with a year ago. The improvement in retail activity and an expectation of strong sales in subsequent months will certainly limit retailers from cutting further staff in the near term.

Despite the improvement in sales there is no doubt that lower pricing is playing a key part in enticing a rather nonplussed consumer. Most businesses would tell you that it is hard work to make a quid. The key is confidence, until confidence levels stage a sustained improvement it is likely that sales will be patchy.

The Reserve Bank Board would be encouraged by the improvement in retail sales. However policymakers are well aware of the array of sectors that are still doing it tough. And given the downside risks to domestic and global growth it is likely that the Reserve Bank will maintain an easing bias. CommSec expects the Reserve Bank to cut interest rates once again by a quarter of a per cent in August.

What do the figures show?

• Retail trade rose by 0.5 per cent in May after lifting by an upwardly revised 0.1 per cent in April. Annual spending growth rose from 2.4 per cent to 3.5 per cent.
• Non-food retailing rose by 0.9 per cent in May after a 0.1 per cent fall in April. Sales by chain-store retailers and other large retailers rose by 0.5 per cent in May after a fall of 0.4 per cent in April. Sales by chain-store retailers and other large retailers were up 3.6 per cent on a year ago – marking the best annualised gain in a year (April 2011).
• Sales rose across five states and territories, led by Northern Territory up 1.5 per cent, with Western Australia, up 1.1 per cent, NSW, up 0.7 per cent, and Queensland and Victoria, both up 0.5 per cent. Spending fell most in Tasmania down 0.9 per cent, followed by South Australia (down 0.6 per cent) and the ACT (down 0.1 per cent).
• The biggest gain in the month was by “Electrical and electronic goods retailing” up 1.8 per cent. Healthy gains were recorded for “Cafes, restaurants and takeaway food” and “Newspaper and book retailing” both up 1.4 per cent. “Footwear and other personal accessory retailing” and “Liquor store” sales were up 1.2 per cent in May.
• The biggest drop in spending occurred at “Supermarket and grocery stores” down 0.3 per cent after rising by 0.4 per cent in April.

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.

What are the implications for interest rates and investors?
Over the last few months consumers have been spending a little bit more freely however it is still early days.

The Reserve Bank will maintain an easing bias and is likely to discuss cutting rates again at the August meeting. We have pencilled in a rate cut in August. The softness in non-mining sectors, the risks surrounding Europe and slower Chinese economic activity all are factors adding to the likelihood of another rate cut. The good news is that we can contemplate a rate cut because inflation is under control. But the June quarter inflation data – released at the end of July – will be closely assessed by policy makers.
 
6 July 2012

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• Inflation hits 2-year low: The TD Securities-Melbourne Institute monthly inflation gauge rose by just 0.1 per cent in February and stood just 2.0 per cent higher than a year ago – a 2-year low.
• Services sector slumps: The Performance of Services index slumped by 5.3 points to 46.7 in February. A reading below 50 suggests contracting activity. It was the fourth contraction in five months.
• New hiring back in vogue: The number of job advertisements rose by 3.3 per cent in February, after rising by 7.5 per cent in January.

What does it all mean?

• Clearly if interest rates are going anywhere in the short term, it is down. Profits barely rose in 2011, posting the second worst performance in the past 17 years behind the GFC period. In addition, data shows that inflation is under control while the services sector continues to move into reverse. Australian companies are certainly struggling at present, a fact borne out by the results over the latest profit reporting season.
• There is no inflation to speak of. The latest gauge from TD Securities suggests that inflation is growing at a 2.0 per cent annual pace – at the bottom of the Reserve Bank’s 2-3 per cent target band. And the Performance of Services index reports that retailers are still discounting heavily.
• Over the past year economy-wide profits grew by just 2.2 per cent. No wonder that businesses have been seeking to cut costs and have been reluctant to hire new staff.
• Inventories rose in the latest quarter but it hardly looks like a positive situation. Sales are rising only slowly so the lift in stock levels appears unintentional; certainly that appears the case in the retail sector. It is hard to believe that retailers were quick to stock up with goods to replenish previous sales. Past sales have hardly been impressive and it would have been a very optimistic retailer that put more stocks on the shelves on the prospect that they would be gobbled up by consumers.
• The main bit of good news is that businesses haven’t totally shut up shop and are still looking to take on staff. If the new hiring results in a net increase of people in jobs then economic activity should recover in the second half of 2012.

What do the figures show?

• Company gross operating profits fell by 6.5 per cent in the December quarter after lifting by 4.7 per cent in the September quarter. Profits have risen in just two of the past six quarters but are still up 2.2 per cent on a year ago.
• In 2011, Australian companies posted profits of $269 billion, up just 2.1 per cent over the year. Apart from the 13.7 per cent fall in profits in 2009 at the height of the global financial crisis, it was the worst profit performance in a calendar year since quarterly records were first maintained 17 years ago.
• Profits rose in 7 of the 15 industry sectors in the December quarter, led by Administrative and support services (up 12.4 per cent) and Electricity, gas & water services (up 4.7 per cent). Profits fell 57.3 per cent in Financial and insurance services followed by “Other Services” (down 49.1 per cent). Profits also fell in Mining (down 8.7 per cent), Manufacturing (down 5.1 per cent) and Construction (down 4.2 per cent).
• Sales rose in seven of the 15 industry groupings in real (inflation-adjusted) terms in the December quarter. Of the major sectors, sales rose by 1.7 per cent in Retail trade, 2.0 per cent in Wholesale trade and 3.1 per cent in Electricity, gas, water and waste services. But sales fell by 0.3 per cent in Mining, 0.2 per cent in Manufacturing and 0.8 per cent in Construction. Total real sales rose by 0.4 per cent in the December quarter to stand 2.7 per cent higher over the year. Excluding mining, sales also rose by 0.5 per cent in the quarter.
• In nominal terms sales fell in just three of the states and territories in the December quarter: NSW and South Australia (both down 1.0 per cent) and Victoria (down 0.6 per cent).
• Inventories rose by 1.4 per cent in the December quarter led by a 2.7 per cent lift in Retail stocks and 2.2 per cent lift in Mining stocks.
• Inventories fell in just Electricity, gas, water and waste services and Accommodation & food services.
• Wages and salaries rose by just 0.8 per cent in the December quarter – the smallest gain in two years – and largely reflecting higher salaries as employment was largely unchanged.

Inflation gauge

• The monthly inflation gauge rose by 0.1 per cent in February following a 0.2 per cent rise in January. The annual rate of inflation fell from 2.2 per cent to 2.0 per cent.
• The underlying rate (trimmed mean) rose by 0.1 per cent in February following a 0.3 per cent rise in January. The annual rate fell from 2.2 per cent to 2.1 per cent.
• Excluding volatile items like petrol and fruit & vegetables, the inflation gauge was unchanged in February after a 0.2 per cent rise in January. The annual rate fell from 2.3 per cent to 2.2 per cent.
• TD Securities noted that “Contributing to the overall change in February were price rises for fruit and vegetables, alcohol and tobacco, and automotive fuel. These were offset by a sharp seasonal fall in holiday travel and accommodation, as well as falls in furniture and furnishings, and financial services. The price of fruit and vegetables rose by 1.8 per cent in February, while fuel prices only rose by 0.5 per cent in the month.”
• TD Securities estimates that headline inflation will lift by 0.7 per cent in the March quarter as a whole, led by non-tradable inflation, with its trimmed mean measure also up by 0.7 per cent.

Job advertisements

• The combined number of internet and newspaper job advertisements, as tracked by ANZ, rose by 3.3 per cent in February after lifting by 7.5 per cent in January. Job ads have now risen three times in the past eight months. Job ads are up 3.6 per cent on a year ago.
  Newspaper job ads actually fell by 8.6 per cent in February, while the far larger component of internet job ads rose by 3.8 per cent.

Services sector gauge

• The Australian Industry Group/Commonwealth Bank Australian Performance of Services index fell by 5.3 points to 46.7 in February. It was the fourth decline in the past five months for the services sector.
• All components of the index fell in February. Of note, the new orders sub-index slumped from 54.1 to a 12-month low of 45.6; the employment sub-index fell from 51.2 to 47.5; and sales fell from 49.4 to 47.5.
• According to the survey: “Retailers continue to report heavy discounting; the average selling prices index for the retail sub-sector is now at its lowest level since 2008.”

What is the importance of the economic data?

• The quarterly Business Indicators publication by the Bureau of Statistics contains measures such as inventories, company profits and income from sales. Higher inventory (stock) levels can be either intentional or unintentional. If stocks are low and sales are expected to rise in the future, businesses will seek to build up stocks. However an unintentional build-up in stocks is where sales fall short of expectations, leaving more goods on the shelves than desired. If profits are increasing then this may point to increased capital spending and employment in the future. Rising profits are also a sign of favourable business conditions.
• 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 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.
• The Performance of Services index is released by Australian Industry Group and the Commonwealth Bank each month. The PSI is designed to provide a guide to conditions in retail, financial and other service sectors.

What are the implications for interest rates and investors?

• Overwhelming the latest batch of data keeps the door open to further rate cuts. Inflation is under control, profits are falling, the services sector is contracting and sales aren’t meeting expectations, leading to higher inventories.
• The good news is that companies are hiring again. The main question is whether the scale of hiring will be enough to lead to a net increase in employment or whether the intake of new workers merely reflects the turnover of positions and natural increase of new entrants into the job market.

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Across the sectors the bulk of the losses in the year to December were recorded in Administration & support services, retail trade, health care & social assistance and manufacturing.

Over 2011 job vacancies fell by 6.3 per cent, resulting in the biggest annualised yearly fall since 2002. Over the past year job vacancies in the mining sector rose by 33.8 per cent followed by communication services up 31.6 per cent.

What does it all mean?
The slowdown in the domestic economy over the past year certainly took its toll on labour market. Job vacancies fell by over 6 per cent in 2011, marking the biggest fall in 9 years. Not only were there less jobs on offer but even the conversion rate to job creation has been poor. In fact over the first 11 months of 2011, a paltry 44,700 news jobs were created – marking the weakest result for a similar period in 15 years. The dearth in consumer spending, slowdown in housing activity and overall tougher trading conditions for businesses has clearly taken its toll on the labour market.

With so much uncertainty around, it is understandable that businesses are in no mood to hire staff. If a business does experience a short-term increase in orders or new work, it is more likely to be met by hiring temps or part-time staff, via a lift in overtime or by working staff longer “normal” hours.

Interestingly the latest result has highlighted the compounding weakness in certain sectors of the economy as employers look to reduce costs while attempting to stay afloat. In fact the biggest casualties of the sluggish economy have been administration and support staff with almost a 40 per cent slide in job vacancies in the past year. Similarly the contraction in retail and manufacturing activity has seen vacancies fall by 18 and 13 per cent respectively. In contrast vacancies in the mining sector have risen by an astounding 34 per cent over the past year. Granted the mining sector is not a major employer but it does provide a substantial multiplier effect for regional economies.

But with hiring down, unemployment is set to edge even higher in coming months. The jobless rate is likely to lift – albeit modestly – from 5.3 per cent to around the 5.5-5.75 per cent region. A softer job market will keep downward pressure on wages and prices and should provide the Reserve Bank more reasons to deliver another rate cut. CommSec expects interest rates to be once again cut in February.

What do the figures show?
The number of job vacancies fell by 3.3 per cent in seasonally adjusted terms to 181,000 in the three months to December (November reference month) – marking the lowest reading in 18 months. Over the past year job ads fell by 6.3 per cent – marking the biggest yearly fall since early 2002.

In original terms job vacancies fell by 2.7 per cent with the ACT leading the declines (down 18.3 per cent), followed by the Northern Territory (down 16.1 per cent), Victoria (down 9.1 per cent), South Australia (down 3.4 per cent), Queensland (down 2.7 per cent) and Western Australia (down 0.9 per cent). Job vacancies rose the most in Tasmania (up 13 per cent) and NSW (up 4 per cent).

Across the sectors Administrative & support services (down 12,300 job vacancies) led the declines over the year to December, followed by Retail trade (down 3,600), Health care & social assistance (down 3,500), Arts & recreation services (1,800) and Manufacturing (down 1,700).
The Mining sector recorded a 33.8 per cent increase in job vacancies over the past year, followed by a 31.6 per cent increase in Communication services.

What is the importance of the economic data?
The Australian Bureau of Statistics releases Job Vacancies data each quarter. The data is useful in gauging the strength of the job market.

What are the implications for interest rates and investors?
The job vacancies data confirms the job market has clearly softened, robbing momentum from the economy. While existing workers may be able to get extra overtime, it’s not the same as adding additional workers to payrolls. When a worker gets a job there are potential flow-on benefits to the housing and car markets as well as broader retail spending. In the current environment if a worker gets more overtime, the extra income is likely to be saved rather than spent.

A further rate cut remains on the radar screen. And given the ongoing instability in Europe and slowdown in China it is likely that the Reserve Bank will look to shore up confidence but cutting rates in February.

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In addition:

• Tourist arrivals fell but departures rose in September
• Tourist arrivals fell for the sixth time in nine months, dropping 4.1 per cent in seasonally adjusted terms in September
• Trade surplus narrows, with Australia’s trade surplus easing by $389 million to $2,564 million in September.
• Over the past 18 months trade surpluses have totalled $34.2 billion.
• Exports fell by 2.5 per cent while imports fell by 1.3 per cent in the month.

What does it all mean?
The latest business confidence figures are hardly encouraging. Yes confidence improved but it was from a sustained level of pessimism and remain well short of long-term averages. In addition the key forward looking indicators were decidedly weaker, trading conditions eased, profitability worsened, while forward orders contracted for the 15th time in 16 months. It is clear that at present Aussie businesses are remaining on the sidelines, uncertain about the outlook and remaining non-committal to investment plans.

Importantly the latest survey occurred in late October, before the interest rate cut by the Reserve Bank on Melbourne Cup day. And as such it is likely that business confidence levels should receive a boost in ensuing months. Although it is unlikely that one rate cut alone can have the profound effect of turning around the lacklustre business survey readings.

More likely if the Reserve Bank wanted to provide a strong degree of support to the economy a further rate cut would do just that. And it certainly has the scope to do so, especially given that the latest business survey has confirmed that overall inflationary pressures are mild and even non-existent in the retail space. CommSec expects a further rate cut to take place in February however if a solution to the European debt crisis is not forthcoming it may result in policy makers cutting rates earlier to support the domestic economy.

Aussies continue to flock overseas in record numbers. Over the past year a record 7.64 million short-term departures were recorded. And while this doesn’t strictly translate to the number of people trekking offshore, it can’t be far off, suggesting that one in three Aussies went abroad for business or pleasure over the year. If retailers are wondering where all their customers have gone, they only need to visit the international terminal.

Australian consumers are devoting more of their budget to holidays and travel and this trend should continue while ever the Aussie dollar remains perched above parity against the greenback. Tourism-reliant businesses will no doubt continue to experience challenging operating conditions but they will need to focus on tapping the opportunities presented by rising income levels through Asia. Almost 700,000 Chinese tourists (including Hong Kong) visited Australia over the past year, up almost 17 per cent over the year.

What is the importance of the economic data?
The monthly National Australia Bank business survey is valuable in providing a timely reading on 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.

The Australian Bureau of Statistics releases data on overseas arrivals and departures is produced monthly and is an indicator of the health of the tourism sector. The figures are also useful in understanding spending trends and tracking migrant numbers – an indicator with widespread implications for employment, housing and spending.

The monthly International Trade in Goods and Services release from the Bureau of Statistics provides estimates on exports and imports of physical goods (such as coal, beef and computers) and services (such as travel receipts). The balance of goods and services (BOGS) is a narrower description of Australia’s external position than the current account estimates. The import data is a useful gauge of consumer and business spending while exports reflect global demand as well as domestic influences such as drought.

What are the implications for interest rates and investors?
The latest NAB business survey certainly doesn’t look overly encouraging. However the recent interest rate cut should provide some degree of stimulus. Importantly it will take a lift in consumer confidence and resulting pickup in consumer spending to support the business sector.
Inflationary pressures are well and truly contained and if it was required the Reserve Bank certainly has the scope to cut interest rates and support activity levels over coming months. The global environment particularly Europe will be a key factor in deciding the timing of the next rate cut.

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Headline developments of the past week

European debt problems took centre stage yet again over the last week. Until recently it appeared that the European Union had put a firewall around Greece, Ireland and Portugal in order to protect Spain and Italy and as a result their bond yields had been contained. However, the spike higher in their bond yields in the last two weeks is worrying because together they account for 28% of Euro-zone GDP (as compared to only 7% for Greece, Portugal and Ireland) and 32% of Euro-zone public debt (compared to only 8% for the three peripherals). Italy in particular is probably just too big to rescue and what’s more German and French banks have a heavy exposure to Spain and Italy. Fortunately, Italy has moved quickly to allay market fears by adopting another round of fiscal austerity. But while bouts of short term relieve are likely, it’s clear that austerity is only making the situation worse and whether it’s Greece, Ireland, Portugal, Spain or Italy the European debt crisis is likely to remain a recurring threat and source of volatility for financial markets for some time to come.

In the US, concern that US politicians won’t agree to raise the debt ceiling by the August 2 deadline has led to increasing fears that it may have a short term default, an event Fed Chairman Bernanke said would through the US financial system into “enormous disarray”. However, there are several points worth noting on this. First, if the debt ceiling is not increased in time spending is likely to be cut ahead of not paying interest payments. More fundamentally though, just as the negotiations between Obama and the Republicans went right down to the wire regarding an agreement on the US budget a few months ago (only just averting a US Government shutdown) the same was always likely to apply in relation to the debt ceiling negotiations. Given the adverse political consequences that would follow from not raising the debt ceiling as welfare and Medicare/Medicaid payments are not made and public servants don’t get paid, the most likely outcome remains a last minute deal…but that could still mean another few weeks of intense uncertainty as the battle between Democrats and Republicans over spending cuts versus tax increases becomes increasingly acrimonious. Australian economic data remains week, with falls in both business and consumer confidence. Against this backdrop a rate hike this year is looking very unlikely.

There were some positives for markets over the last week though. Firstly, Fed Chairman Bernanke indicated that another round of quantitative easing (QE3) could be undertaken if the economy doesn’t pick up as expected. However, he also indicated the Fed wasn’t prepared to do it yet – it’s clear that the US economy will have to get worse and inflation fall before QE3 becomes likely.

Secondly, and more fundamentally, the Chinese economy is continuing to do its part in keeping the global economic recovery going with growth of 9.5% over the year to the June quarter helped along by strength in industrial production and fixed asset investment. While growth has slowed from an unsustainable pace of nearly 12% early last year there is no sign of the much feared hard landing. While headline inflation came in at a worse than expected 6.4% over the year to June this was driven largely by higher pork prices on the back of pork disease with non-food inflation starting to stall on a monthly basis. With Premier Wen Jiabao indicating that the Government should “not only stabilize inflation but also prevent major economic volatility” our assessment remains that the moderation in growth will result in a fall in inflation during the second half and that the monetary tightening cycle in China is either at or very close to an end.

The past week has seen share markets (except in China) fall sharply on the back of debt worries in Europe and the US and concerns about the growth outlook. Volatility in share markets is likely to remain high in the short term as the worry list remains significant – focussed on European debt problems, the US debt ceiling, the soft patch in the US economy and whether China will have a hard or soft landing – and the September quarter is normally the weakest time of the year for shares.

In the US in the week ahead, expect housing related data to show signs of stabilisation or improvement with a home builders survey due Monday, housing starts due Tuesday, home sales due Wednesday and house price data due on Thursday. A survey of manufacturing conditions in the Philadelphia region for July is expected to show a modest improvement after a sharp fall in June. The US June quarter earnings reporting season will start in earnest with investors expecting profit growth of around 13-15% on a year ago. In Europe the focus will likely be on business conditions readings due Friday after falls in recent months, along with ongoing debt problems.

In Australia, the minutes from the RBA’s July meeting due Tuesday are likely to confirm that there is no urgency to raise interest rates. Data for car sales and export and import prices are also due for release.

The post Weekly economic and market report appeared first on AdviserVoice.

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.

In the last report in April 2011 the ACT was judged the strongest economy from Western Australia. But in the latest quarter the tables have been turned with Western Australia now on top. Western Australia leads the way in overall economic growth and is strong in retail spending and commercial and engineering construction. The ACT economy benefits from strong housing and commercial construction and historically-high population growth.

Next strongest economy was Victoria, followed by South Australia with little separating the economies of Tasmania and Northern Territory. Victoria maintains a strong job market and has above-average growth on housing finance. And South Australia benefits from strong equipment investment and above-normal population growth.

Looking ahead, the NSW economy should benefit in coming months from relatively high population growth and firm housing lending. And Queensland should benefit from rebuilding activity after the floods and cyclones in early 2011.

Western Australia now on top, from the ACT and Victoria
Western Australia is back on top, judged to have the strongest economy in the land. Western Australia continues to benefit from strength in mining and engineering, driving commercial construction, exports and overall economic growth. But the housing sector remains soft as is clear by the sharp slowdown in dwelling starts and falling home prices.

Looking across the indicators, the ACT leads the way on four of the eight indicators – population growth, commercial & engineering construction, housing finance and dwelling starts. The main blots on the copybook have been the weakening job market and weaker business investment. In addition retail spending in the ACT is under-performing other state & territory economies.

There has been little change in the relative performance of the Victorian economy over the past three months. Unemployment remains historically-low and that is supporting housing lending, retail spending and home building.

The South Australian economy has benefited from stronger investment and plant and equipment spending stands at record highs in trend terms. Above-average population growth also provides support to the economy although home lending is under-performing other economies.
Tasmania has been a clear improver over the last three months benefitting from stronger construction work which is now 32 per cent above decade averages. The Northern Territory maintains its top rankings on the job market and retail spending but business investment is now 39 per cent below the decade average.

The performance of the NSW economy continues to be restrained by the construction sector – both new home building as well as commercial and engineering activity. The job market has also softened in relation to other states and territories but relative strength in population growth augurs well for future spending and investment.

The Queensland economy is still in the early stages of recovery from the floods and cyclone that occurred earlier this year. Once rebuilding gets fully underway it should provide momentum through the broader economy. But activity in coal producing areas is still hampered by flooding. The housing market also remains weak, whether it be new building, home lending or home prices.

How was performance judged?
Each of the states and territory economies were assessed on eight key indicators: economic growth; retail spending; equipment investment; unemployment, construction work done; population growth; housing finance and dwelling commencements.
The aim was to find how each economy was performing compared with “normal”. And just like the Reserve Bank does with interest rates, we used decade-averages to judge the “normal” state of affairs. For each economy, the latest level of the indicator – such as retail spending or economic growth – was compared with the decade average.

While we also looked at the current pace of growth to look at economic momentum, that can yield perverse results to judge performance. For instance retail spending may be up sharply on a year ago but from depressed levels. Overall spending may still be well below “normal”. And clearly some states such as Queensland and Western Australia consistently have faster economic growth rates due to historically faster population growth. So the best way to assess economic performance is to look at each indicator in relation to what would be considered ‘normal’ for that state or territory.

For instance, the trend jobless rate of 4.0 per cent in the ACT is lower than in all but the Northern Territory. But compared with its ‘normal’ or decade-average rate of 3.5 per cent, the jobless rate is actually higher in percentage terms than any other economy, affecting activity in the retail sector. Trend measures of the economic indicators were used to assess performance rather than more volatile seasonally adjusted or original estimates.

Economic growth
Ideally gross state product (GSP) would be used to assess broad economic growth. But the data isn’t available quarterly. Rather state final demand (household and business spending) is added to exports less imports to act as a proxy for GSP. Excluding the trade sector would provide an incorrect assessment of growth for economies such as Western Australia and Queensland.
Western Australia continues to lead the rankings on economic activity from the ACT and Northern Territory. In the March quarter, Western Australia’s economic output was just over 28 per cent higher than the state’s decade average level of output. ACT output was up 22 per cent on its long-term average, followed by the Northern Territory (up 17.5 per cent).

At the other end of the scale economic activity in NSW in the March quarter was just over 9 per cent above its decade while Queensland activity was up 10 per cent on its “normal” or average output over the past decade. The ACT has the fastest annual economic growth rate in the nation at 7.2 per cent, ahead of Western Australia with 6.1 per cent and South Australia with 6.0 per cent. The weakest trend economic growth rates were recorded in Queensland (-3.6 per cent) from Northern Territory and NSW.

Retail trade
The measure used was real (inflation-adjusted) retail trade in trend terms with March quarter data the latest available. Monthly retail trade was also assessed (May data available) to provide further information on trends. There were no differences in the rankings despite the monthly data being two months advanced on the real, quarterly readings.

Still leading the retail rankings is Northern Territory with spending in the March quarter 22 per cent above decade average levels. Spending has been supported by a strong job market and rising home prices. But it’s worth noting that actual growth in spending in the “top end” has been weakening and is down 1.4 per cent on a year ago in real terms.

Western Australia was next strongest, courtesy of low unemployment, with spending 19 per cent above decade-average levels. Western Australia also has the strongest growth in retail spending, up 2.8 per cent on a year ago. Victoria was next strongest, with spending 16 per cent above decade averages, followed by Queensland and South Australia. Tasmania is now at the bottom of the leader-board, with spending up just 11 per cent on the decade average. And real retail spending in Tasmania is 3.7 per cent down on a year ago – the weakest performance of the states and territories.

Equipment investment
Compared with longer-term averages, Western Australia currently is leading other states and territories on equipment investment with spending in the March quarter almost 50 per cent above “normal” – or decade-average. Next placed is NSW (up 31.9 per cent), followed by South Australia (up 23.3 per cent).

By contrast, equipment spending in the Northern Territory was largely unchanged compared with its decade-average. Next weakest economy – ACT – had business investment 6.9 per cent above its longer-term average in the March quarter.
Equipment investment was only lower than a year ago in two of the state and territory economies – Northern Territory (down 39 per cent), Victoria (down 6.0 per cent and Queensland (down1.4 per cent).
In the ACT, equipment investment is 42.5 per cent higher than a year earlier, while investment in South Australia is at record highs, up 13.1 per cent on a year ago.

Unemployment
The Northern Territory still has the strongest job market in the nation, but there has been clear slippage in the past three months with similar softening in the ACT. The trend jobless rate in the Northern Territory stands at 3.7 per cent – well below the long-term average of 4.7 per cent. But unemployment has lifted from a rate of 2.4 per cent in January. And in the ACT, the jobless rate has lifted from 3.1 per cent to 4.0 per cent over the past 10 months and is now 15 per cent above the decade average of 3.5 per cent.

Victoria was next strongest to the Northern Territory with a jobless rate of 4.7 per cent, 12 per cent below the decade average of 5.3 per cent. And Tasmania has a jobless rate of 5.6 per cent, below its “normal” rate of 6.3 per cent.

Construction work
The measure used for analysis was the total amount of residential, commercial and engineering work actually completed in trend terms in the March quarter.In all states/territories except the Northern Territory, construction work is substantially higher than decade averages. Construction peaked in the ‘top end’ in the March quarter 2009 at record levels. The relatively small Northern Territory economy is affected to a greater extent by the ‘lumpiness’ of major construction projects. Construction work in the Northern Territory is down 28 per cent on the decade average.

In the ACT construction work done in the March quarter was just shy of 74 per cent above the decade average. Construction work in the ACT is also up 22.5 per cent on a year ago – the fastest rate in the nation. Next strongest was Western Australia with construction work 65 per cent higher than decade averages followed by Tasmania, up 32 per cent, and South Australia, up 31.5 per cent. Construction work is higher than a year ago in all states/territories except South Australia (down 8.8 per cent), Queensland (down 3.0 per cent) and Northern Territory (down 2.1 per cent).

Population growth
Across the states and territories the current annual rate of population growth was compared with each economy’s decade-average growth pace. And currently population growth is above ‘normal’ in all states and territories except Northern Territory (down 49 per cent), Queensland (down 29 per cent) and Victoria (down 1.4 per cent).

Population growth is fastest in Western Australia (2.09 per cent) followed by the ACT (1.95 per cent) and Queensland (1.70 per cent).
At the top of the rankings on the population growth leader board is the ACT with current annual population growth, well above the 1.3 per cent decade average. Next best was NSW, followed by South Australia and Tasmania. While Tasmania’s population growth of 0.77 per cent remains the slowest in the nation, it still remains 2.8 per cent higher than the decade average.

At the other end of the leader-board in Northern Territory with the 0.83 per cent population growth the slowest in seven years and 48.6 per cent the 1.6 per cent decade-average growth pace.
In Queensland, population growth has eased from 2.86 per cent in December quarter 2008 to 1.70 per cent – the slowest growth pace in 11 years.

Housing finance
The measure used was the trend number of housing finance commitments and this was compared with the decade-average for each respective state and territory.
 
Housing finance is not just a lead indicator for real estate activity and housing construction but also is an indicator of activity in the financial sector. It would be good to also use figures on commercial, personal and lease finance, but unfortunately trend data is not available for states and territories.

Far away in top position for housing finance is the ACT. The number of housing finance commitments in the ACT is 15.5 per cent higher than the decade-average at a time when all other states and territories except Victoria are recording negative growth. The high level of activity is positive for financial institutions, real estate agents and builders in the territory. And not is housing lending in the ACT above longer-term averages, it is also growing, up 4.9 per cent over the year and second strongest behind Western Australia (up 9.3 per cent).
Victoria is in second spot for housing finance, with the number of commitments 0.5 per cent above the long-term average. And just like the ACT, home lending is also growing, up 4.1 per cent in trend terms compared with a year ago.

NSW was third on housing finance, albeit down 15.7 per cent on the decade average followed by Western Australia (down 16 per cent) and Tasmania (down 21.5 per cent).

The Northern Territory remains the weakest economy for housing finance with trend commitments 31.1 per cent lower than its decade average. In addition, housing finance commitments in May were over 11 per cent down on a year ago. Queensland is next weakest with home lending 30.7 per cent below decade averages and down 10.6 per cent on a year ago.

Dwelling starts
The measure used was the trend number of dwelling commencements (starts) with the comparison made with the decade-average level of starts. Starts are driven in part by population growth and housing finance and can affect retail trade, unemployment and overall economic growth. However any over or under-building in previous years can determine the current level of starts.

The ACT continues to lead the pack on dwelling starts. In the March quarter the number of dwellings commenced stood at a record 1,294 in trend terms, just off the record high of 1,332 in the December quarter. Starts are almost 82 per cent and up 20.3 per cent on a year ago.
In second spot was Northern Territory with dwelling starts in the March quarter almost 42 per cent higher than ‘normal’ or “decade average” levels while Victorian starts were 24.2 per cent above the decade average. Strong home prices over most of 2010 together with low unemployment have driven the improvement in home building in the “top end’. Starts are at 11-year highs in trend terms.

Victoria was followed by Tasmania with starts up 7.5 per cent on decade averages. At the other end of the scale, Queensland dwelling starts were not only 26.6 per cent below decade averages but also they are 18.3 per cent down on a year ago. In NSW, dwelling starts were 13.4 per cent below decade averages in the March quarter, with Western Australian starts 10.4 per cent below decade averages and South Australian starts 10 per cent below its “normal” rate of activity. NSW was the only state of these three to post stronger starts compared with a year ago (up 4.4 per cent).

Other indicators
Consumers in all states and territories except South Australia continue to enjoy real wage gains (wages growing faster than prices). South Australian wages are growing in line with prices. Western Australian workers are doing best with wages up 4.1 per cent over the year, outpacing a 2.6 per cent lift in consumer prices. As would be expected retail spending in the state is also solid, with real growth the fastest in the nation with spending 19 per cent above the decade average.

Home prices are now falling in all capital cities except Sydney (dwelling prices up 1.0) per cent. Next best was the ACT with dwelling prices just 0.1 per cent on a year ago. Wages are expected to outpace prices over the remainder of 2011. And while home prices are currently down on a year ago in most capital cities, the trend for the remainder of the year is expected to be sideways rather than down. Housing markets are generally under-supplied with stock.

Implications and outlook
There has been little change in the state rankings over the past three months, Western Australia and the ACT are at the top; Victoria has held ground in third spot followed by South Australia with Northern Territory and Tasmania together. Provided China continues to grow then the Western Australian economy will continue to thrive. But just as the broader Australian economy is multi speed, so is the situation in Western Australia. Mining areas are thriving but weaker housing activity is creating challenges in Perth and non-mining regional towns.

The ACT economy is being propelled by above-average population growth, driving construction activity. But the lift in the jobless rate raises questions about whether the strong economic performance can be maintained. There is unlikely to be major changes in the middle rankings with Victoria and South Australia modestly ahead of Tasmania and Northern Territory. But there is little to separate these economies.
An extended period of interest rate stability could provide the momentum that NSW and Queensland economies both need – injecting interest in the housing sector. We continue to expect that the Queensland economy will benefit from rebuilding and refurbishment activity as well as a recovery in coal production. But the high Australian dollar will continue to provide challenges for the tourism sector – fewer international visitors and more Aussie travelling abroad.

Consumer conservatism and the uncertainty provided by proposed carbon and mining taxes will provide challenges for all the states and territories over the next 3-6 months.

The post State of the states – state & territory performance report appeared first on AdviserVoice.

• The unemployment rate was unchanged at 4.9 per cent in June. The participation rate edged up from 65.5 per cent to 65.6 per cent. The working age population rose by 19,600.
• Employment rose by 23,400 people in June. Economists had tipped job gains of around 15,000. But the May result was sharply revised lower to show job losses of 500 (previously showed job gains of 7,800).
• Full-time employment rose by 59,000 in June (May jobs were down by 29,400) and part-time jobs fell by 35,600 (Mayjobs rose by 28,800).
• Average hours worked rose 0.5 per cent in June after rising by 0.5 per cent in May. The number of hours worked is up 1.7 per cent on a year ago.
• Across the states and territories unemployment rates in June were: NSW 5.2 per cent (4.9 per cent in May); Victoria4.6 per cent (5.1 per cent); Queensland 5.3 per cent (5.2 per cent); South Australia 5.1 per cent (5.4 per cent); Western Australia 4.2 per cent (4.3 per cent); Tasmania 5.5 per cent (5.8 per cent); Northern Territory 3.7 per cent (3.4 per cent); ACT 4.0 per cent (3.8 per cent).
• Victoria led the job gains in June (up 18,200) followed by South Australia (up 6,900) and Western Australia (up 2,600). NSW led the job losses (down by 17,000), followed by Northern Territory (down 1,000 in trend terms), Tasmania and Queensland (both down 700), and ACT (down 200 in trend terms).

What does it all mean?

• The latest employment data certainly looks robust – especially given the surge of 59,000 new full-time jobs. However it is just one month’s data and the monthly job figures tend to be volatile. Keep in mind that the prior two months saw full-time job losses of almost 80,000. In fact the previous month’s job gains of 7,800 has now been revised to show job losses of 500 people.
• A better indication of the labour market would be the unemployment rate which has effectively gone nowhere for seven months. It is clear that there is a better balance in terms of supply and demand in the labour market. Even annual employment growth rate has eased in recent months from a six-year high of 3.6 per cent to 2.0 per cent in June – the weakest growth rate in 16 months.
• Reading between the lines it is clear that the soft readings on economic activity are being reflected in the job market figures. Manufacturing, construction and the services sector all remain soft, while businesses are trimming new orders and profitability is being affected – given the lack of activity. No doubt the softer economy is ensuring that businesses remain cautious and more circumspect about future hiring.
• Overall the job market is in reasonable shape, but it is now going sideways. Certainly today’s result accords with the views of the Reserve Bank that the job market isn’t overly tight at present. Overall the Reserve Bank will remain hesitant about increasing interest rates anytime soon. CommSec is still pencilling in one rate hike over the next six months but the data flow would have to record a substantial improvement to justify the rate hike.
• Across the states the bulk of the job losses were recorded in NSW – consistent with the other key data releases this week showing weak retail spending and even weaker building approvals. It’s also worth noting that if you add up the employment results for the individual states the job gains total a much more sedate 8,100 instead of 23,400. It seems the seasonal adjustment process is playing a part in the overall result.

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