• Australia’s population grew by 69,703 people over the December quarter to 22,477,378. Annual population growth slowed from 1.57 per cent to 1.47 per cent – the weakest growth rate in almost five years.
• Despite businesses crying out for skilled migration, the Government’s reduction in the skilled migrant intake meant that in-bound migration hit a near 4-year low in 2010. Over 2010, 171,100 migrants came to Australia.
• There were 297,900 babies born in 2010 – holding just shy of the highest reading since quarterly records began 28 years ago (303,500 in March 2010).
• The financial wealth of Australians hit 3-year highs in the March quarter. But consumers and businesses are increasingly holding assets in cash or deposits.

What does it all mean?

• The Federal Government must shoulder the blame for the sharp slowdown in Australia’s population growth over the past year. Despite persistent calls for skilled migrants, the Government wound back the skilled migrant intake,exacerbating the tightness of the job market and contributing to the slowdown in the economy.
• In 2008, almost 316,000 migrants came to our shores but this slowed to 264,000 in 2009 and to a four-year low of 171,000 in 2010. The reduced number of migrants has contributed to upward pressure on wages and led to reduced demand for housing and slower retail sales. While the migrant intake has been lifted for the coming year,the question is whether it is sufficient. In order to cap wage growth, supply of labour has to keep pace with demand. The best way of ensuring this in the short-term is skilled migration as up-training of Australian jobless takes time. Further, there are doubts that this up-training can be successful in meeting the specific skilled labour shortages across the country.
• The Reserve Bank has been polite in pointing to the need for increased labour supply to meet higher demands. Arguably it should be more forceful in warning that if migration isn’t lifted, the risk is that interest rates will need to rise.
• Cash is king. Australia’s increasingly cautious consumers and businesses are continuing to hold their wealth in cash or bank deposits. And Australian companies are well into the black, with non-equity assets a record $130 billion more than the level of outstanding loans. The environment is much more akin to the 1950s or 1960s when people chose to live within their means and keep borrowings at low levels in relation to assets.
• Foreigners are losing patience with Australia, selling down their holdings of Australian shares in the March quarter. Our high dollar combined with mooted taxes on carbon emissions and mining profits are spooking foreign investors. Clearly this is a wake-up call for the Federal Government.

What do the figures show?

Population Statistics:

• Australia’s population expanded by 325,469 people over 2010 to 22,477,378 people. Overall, Australia’s population growth rate eased from 1.57 per cent to a five-year low of 1.47 per cent. Population growth had hit a40-year high of 2.20 per cent in the year to December 2008.
• A total of 171,100 people migrated to Australia over 2010, the lowest annual total in over four years (since the year to September 2006). The record high was 315,700 in-bound migrants over the year to December 2008.
• There were 297,900 babies born in 2010, just shy of the record 303,500 births in the year to March 2010.
• Population growth eased in all states and territories except the ACT in the December quarter. Over the past year population growth was fastest in Western Australia (2.09 per cent), followed by ACT (1.95 per cent), Queensland(1.70 per cent), Victoria (1.56 per cent), NSW (1.22 per cent), South Australia (0.95 per cent), Northern Territory(0.83 per cent) and Tasmania (0.77 per cent).
• Population growth in the ACT is at 3½ year highs. But population growth in Queensland is at 11-year lows with Northern Territory population growth at 7-year lows.

Financial Accounts:

• The net financial wealth of Australian households (assets less liabilities) rose for the third straight quarter, lifting by 2.4 per cent in the March quarter.
• Financial assets of households (such as shares, bank deposits) rose by $50.6 billion or 1.9 per cent in the March quarter to $2,651.3 billion. Of the total, 25.3 per cent was held in cash and deposits, above the long-term average of 22.7 per cent. Financial liabilities of households grew by $24.2 billion or 1.6 per cent to a record $1,545.5billion.
• Overall, net household financial wealth (assets less liabilities) rose by $26.4 billion to $1,105.8 billion at the end of the March quarter. Financial wealth is up 7.0 per cent on a year ago but is still down 8.1 per cent from the record high set in the September quarter 2007.
• Net household wealth per capita rose from $48,025 to $49,045. Per capita wealth is up 9.7 per cent over the past five years and up 40.8 per cent over the past decade.
• The household debt to liquid assets ratio rose by 1.2 percentage points to 161.9 per cent in the March quarter. The ratio shows that households do not have sufficient readily liquefiable assets to cover outstanding debt, highlighting a degree of vulnerability in the current economic environment.
• Foreigners sold $1.9 billion of Australian equities in net terms in the March quarter after buying $28.5 billion of equities in the December quarter. The Aussie dollar remained at historically high levels in the quarter, hitting 29-year highs of  US103.34c on March 31.
• Foreign investors held $585.4 billion of Australian listed shares as at the end of March quarter or 41.3 per cent of the total. While the share was modestly down from the December quarter it wasn’t far short of the 12-year high of 43.3 per cent in March 2009 (when the Aussie was at US68.7 cents).

• Assets held by superannuation funds (pension funds) rose by $20.6 billion (2.9 per cent) in the March quarter to $1,164.5 billion. Super funds held 14.7 per cent of assets in cash and deposits, down slightly from the 14.9 percent held in December and well above the long-term average of 8 per cent.
• Non-equity assets held by Australian companies (non-financial) stood at $682.7 billion at the end of March, a record $129.5 billion higher than loans. Short and long-term loans rose by $6.5 billion (1.2 per cent) to $553.3billion at the end of March. Companies held 30.9 per cent of assets in currency and deposits, just shy of the highest level in 11 years.
• The value of listed equities rose by just $16.9 billion (1.2 per cent) to $1,417.5 billion at the end of March. The value of currency and deposits rose by $45.1 billion (2.8 per cent) to $1654.4 billion.
• As at the March quarter, 19.6 per cent of assets were held in listed equities (19.8 per cent long-term average);20.1 per cent held in bonds (17 per cent average); 22.8 per cent held in cash and deposits (20.5 per cent average). Smaller than normal shares of assets were held by unlisted equities (20.4 per cent, compared with 24.1per cent average) as well as bills of exchange, accounts receivable, derivatives and one-name paper.

What is the importance of the economic data?

• Demographic Statistics are issued by the Bureau of Statistics each quarter. The figures include estimates of births, deaths, in-bound and out-bound migration movements and estimates of population change by State.
• The Australian Bureau of Statistics releases the Financial Accounts publication each quarter. The data covers assets, liabilities and financial flows for the key sectors of the economy. Figures on financial wealth help reveal the true state of household finances.

What are the implications for interest rates and investors?

• The conservatism expressed by consumers and businesses in conducting their financial affairs has further watered down the risk of a near-term rate hike.
• The Federal Government must closely assess the labour needs of Australian businesses. The sharp fall inmigration inflows over the past year has served to weaken the economy and added to the tightening of the jobmarket.
• The under-performance of the Queensland economy and out-performance of the ACT economy have much to do with population flows.
• Foreigners are losing patience with Australia. Australian equities have become more expensive, courtesy of a high dollar, but the risks of investing in Australia continue to rise with mooted carbon and mining profit taxes.

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• Council approvals to build news homes fell by 7.4 per cent in February after sliding by a revised 11.6 per cent in the prior month. In annual terms approvals are down 21.8 per cent on a year ago.
• The floods continue to play a part in the weak result, but even excluding Queensland new dwelling approvals fell by a considerable 6.6 per cent in February.
• Retail spending grew by 0.5 per cent in February – in line with the Commonwealth Bank Business Sales Indicator which was released two weeks ago. Over the past year retail trade lifted by just 3.6 per cent.
• Across the states Queensland retailers outperformed their peers with sales up 2.3 per cent in February.
• Private sector credit rose by 0.5 per cent in February to stand 3.4 per cent higher than a year ago. Housing credit grew by 7 per cent in annual terms marking the weakest annual growth rate in records going back 34 years.

What does it all mean?

• The weakness in housing activity is here to stay – at least for the near term. After sliding by almost 12 per cent in January, approvals have slumped by a further 7 per cent in February. In fact in annualised terms approvals are now down over 24 per cent on a year ago. Whichever way you cut it the weakness in housing activity is plain to see.
• There is no doubt that the wet weather and in particular the floods in Queensland have had a serious detrimental impact to activity levels. Especially given that Queensland approvals have fallen by over 20 per cent in the past two months, but even when Queensland is excluded, approvals fell by a sizeable 6.6 per cent in February.
• The building approvals series tends to be volatile especially given that apartment approvals, tend to be lumpy. And it is important to note that the figures are likely to be revised in coming months, given the flooding. Despite the possibility of revisions to the data, it is clear that there is an underlying level of weakness in housing activity. Not only is overall building approvals plummeting but the all important private sector new house segment remains weak, with a 17 per cent slide in the annual growth rate.

• The retail sector has certainly done it tough over the past year. Annualised growth in sales is still subdued at just 3.6 per cent – a far cry from the decade average growth of 6 per cent. The tightening of monetary policy and unwinding of stimulus has been the key reason for the turnaround in the fortunes of the retail sector. The domestic economy is not shooting the lights out and retail activity is sluggish.
• The larger department and chain stores have fared better, given the ability to discount to a greater degree. In annual terms sales are up 4.5 per cent at the larger retailers while smaller retailers recorded growth of just 2 per cent. On a positive note Queensland retailers outperformed their peers in the month of February with sales up 2.3 per cent. It may be an early sign of the rebuilding that should gain traction in coming months.
• Part of the sustained weakness in the retail sales data can be blamed on lower prices, rather than weaker spending, given the widespread discounting taking place across the retail sector. However weaker volumes are clearly playing their part. Prices of some goods are coming down because our dollar is strong, but plenty of
  retailers are cutting prices because consumers refuse to spend.
• The Australian economy has certainly lost momentum over the last couple of months. Not only are house prices going backwards, but retail spending is barely growing. And even the latest improvement in private sector credit comes after considerable period of weakness. The pickup in business credit is encourage but follows seven months of going backwards. Further improvements would be needed in coming months to claim a full blown turnaround.

What do the figures show?

Retail trade:

• Retail trade rose by 0.5 per cent in February after a 0.4 per cent rise in January. Non-food retailing rose by 0.9 per cent in February after fall by 1.1 per cent rise in the prior month. Over the past year retail trade lifted by just 3.6 per cent.
• Sales by chain stores and other large retailers rose by 0.5 per cent in seasonally terms in February while sales by smaller retailers rose by 0.6 per cent. In annual terms sales at chain stores were up 4.5 per cent on a year. Sales at smaller retailers were up just 2.0 per cent on a year ago.
• During February, sales increased most at other Furniture, floor coverings, houseware and textile goods retailing (up 4.3 per cent). Other retailing groups like newsagencies, stationary shops and florists recorded healthy gains up 3.1 per cent in the month. Sales fell most at other recreational good retailers – including sporting, entertainment and toy retailers – (down 2.2 per cent), followed by footwear retailers (down 1.1 per cent).
• Across the states sales lifted most in Queensland (up 2.3 per cent), followed by Northern Territory (up 1.7 per cent), Western Australia (1.6 per cent), and Tasmania (up 1.3 per cent). Sales fell in the ACT (down 1.6 per cent), South Australia (down 0.5 per cent and Victoria (down 0.3 per cent).

Building Approvals:

• New dwelling approvals fell by 7.4 per cent in February, after sliding by a downwardly revised 11.6 per cent in January. Dwelling approvals are down 21.8 per cent on levels of a year ago.
• Excluding Queensland new dwelling approvals fell by 6.6 per cent in February.
• House approvals rose by 0.5 per cent in February (private sector up 0.2 per cent), after sliding by 2.8 per cent in January. Apartment approvals fell by 20.5 per cent in February (private sector was down 20.0 per cent) after sliding by 23.3 per cent in January. In annual terms apartment approvals are down 26.1 per cent on a year ago, while house approvals are down 19.5 per cent.

• Dwelling approvals fell in three of the six states in January, with Victoria (down 23.1 per cent) faring worst followed by Queensland (down 11.8 per cent). Approvals rose the most in Tasmania (up 44.4 per cent) and South Australia (up 35.9 per cent).
• In annual terms approvals across the state: NSW (down 10.4 per cent), Victoria (down 17.6 per cent), Queensland (down 38.7 per cent), South Australia (down 2.4 per cent), Western Australia (down 38.6 per cent), and Tasmania (up 1.2 per cent).
• The value of building approvals rose by 13.7 per cent in February and was lower by 9.5 per cent on a year ago.

Private sector credit

• Private sector credit (lending) rose by 0.5 per cent in February after rising by 0.3 per cent in January. Credit growth is up 3.4 per cent on a year ago.
• Housing credit grew by 0.5 per cent with lending to owner-occupiers rising by 0.6 per cent and investor housing up 0.4 per cent. Housing credit is up 7.0 per cent on a year ago – the weakest annual growth in 20 months. Owner occupier housing credit is up 6.8 per cent on a year ago – slowest pace in records going back 20 years. Investor housing lending was up 7.5 per cent on a year ago.
• Personal credit remained rose by 0.2 per cent in February after rising by 0.1 per cent in January. Personal credit was up 0.7 per cent over the year – still well below the rate of inflation. Business credit rose by 0.6 per cent after sliding for seven straight months. Business credit is down 1.7 per cent on a year ago and has been consistently contracting for the past 20 months.

What is the importance of the economic data?

• 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.
• 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.
• Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.

What are the implications for interest rates and investors?

• The domestic economy is certainly facing headwinds, with the higher Australian dollar curbing tourism and making exports less competitive. At the same time the conservative attitudes of consumers have ensured that retail activity remains relatively weak, while activity in the housing sector remains sluggish.
• More and more it is looking like the Reserve Bank will stay on hold on the interest rate front over the next couple of months. There is nothing in the data to force the Reserve Bank to once again look at rate hikes in the near term.

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The big picture

• The Reserve Bank Board meets again on Tuesday to decide interest rate settings. But this month – as was the case last month – there is no contention: there is no need for a change in rate settings in either direction.
• First, the floods that occurred in Queensland and other states, as well as Cyclone Yasi, are still causing variable business conditions across the country. Some businesses are still not fully back up and running, while others are starting to benefit from the repair/refurbish/rebuild work.
• Second, is consumer conservatism. Consumers are still not spending like they used to, causing inventories to accumulate and thus translating into on-going discounting. The RBA Board members get sent their papers for Tuesday’s meeting on Friday, so it is unclear how much of Thursday’s and Friday’s data finds its way into the packs. Board members will also need to take into consideration next week’s results for the inflation gauge. Importantly the core measure of prices in the inflation gauge has barely moved over the past seven months.
• Third, the housing market has clearly flattened. One large builder has told us that he has cut staff from 300 to 220 and will soon shift to a 9-day fortnight. Home prices are also falling in many parts of the country. Simply, demand and supply are better balanced, making builders and vendors nervous, but providing opportunities for cashed up buyers.
• Fourth, consumers and businesses are still more inclined to put money in the bank rather than borrow. Credit demand remains soft with business lending still falling in annual terms and personal credit growing at a slower pace than the rate of inflation. Housing credit may be holding up, but it is also poised to slow in line with new
  housing loan demand.
• Fifth, there is the mixed state of the global economy. The US economy continues to improve and Asian economies are solid. China is also in strong shape, but it is battling to keep inflation under control. Europe is multi-speed though and then there is the instability in North Africa and the Middle East that is affecting activity in the region and confidence in other parts of the globe. While activity in Japan will pick up later in the year, the economy will be soft for the next few months.
• Overall it is clear that the safest place for the Reserve Bank is on the monetary policy sidelines. The next move in interest rates is still more likely to be up, not down, but given all the shocks that have occurred in 2011 so far, it would be a brave person to state these views with 100 per cent confidence.

The week ahead

• The start of the month is usually a busy time for economic data and events and April is no different. More than half a dozen key economic indicators will be released over the coming week with a decision on interest rate settings thrown in for good measure. In contrast there are only a spattering of economic indicators to be released in the US.
• On Monday the monthly inflation gauge is released together with readings on job advertisements. For seven straight months the core measure of the TD Securities inflation gauge has barely moved, either flat or up 0.1 per cent in monthly readings over the period. Another month of negligible growth would guarantee that the Reserve Bank Board leaves rate settings alone when it meets on Tuesday. The three-month annualised rate of core inflation stands at just 0.3 per cent.
• The Advantage job ads index rose by 6.1 per cent in February and the ANZ series was up by 1.2 per cent. Job ads lead employment growth by 5-6 months, so the job market should remain healthy, perhaps translating into stronger consumer spending.
• As well as a Reserve Bank Board meeting there are a couple of economic indicators to watch. Trade data for February is released together with the Overseas Arrivals and Departures information. The latter includes statistics on tourist arrivals and departures as well as migration flows. It may be too early to see the impact of the floods and cyclone on tourist arrivals. But migration should be in focus – politicians have to work out that our economy needs more skilled labour. A trade surplus of $1.2 billion is expected for February.
• The initial soundings from the Bankers Association suggest that demand for new home loans slumped in February, possibly as much as 7 per cent. Now clearly the impact of the floods and cyclone on the Queensland market should be carefully dissected. But if the weakness is more uniform across the country then the Reserve Bank will start worrying about a loss of economic momentum.
• The most interesting economic data in the coming week will be Thursday’s jobs data. Employment has gone backwards over the past two months with the number of jobs down by 10,100 in February after lifting by 7,700 in March. Clearly there is a “Queensland effect” with jobs down in that state by over 20,000 in February, but four other states and territories also lost positions. Unemployment remains low at 5 per cent. We tip job growth to rebound by 25,000 in March with the jobless rate largely unchanged, perhaps a tad lower.
• In the US, the economic indicators are few and far between in the coming week. The ISM services gauge is released on Tuesday with weekly jobless claims (new claims for unemployment insurance) to be issued on Thursday together with consumer credit data while figures on wholesale sales and inventories are issued on Friday.
• The other indicators – consumer credit and wholesale inventories – are largely of secondary importance for investors, but they deserve more attention. Consumer credit has risen for four months after 20 months of declines, so the lift in lending is clearly positive for consumer-focussed businesses. And wholesale inventories are also rising for the simple fact that they have to because sales are strong. In fact the 3.4 per cent lift in February sales was the biggest in 24 years. The stock to sales ratio is at record lows.

Sharemarket

• There have been mixed performances on world sharemarkets since the start of the year. So far 33 of the 72 bourses tracked are higher now in local currency terms while the remainder have fallen. The country with the strongest sharemarket is Russia (up 14.2 per cent) followed by Romania (up 13.8 per cent) and Ukraine (up 12.4 per cent). Also notable at the top of the leader-board is Greece, up 14.8 per cent, and clawing back some of the 35.2 per cent decline in 2010. At the other end of the leader-board the Egyptian sharemarket is down 20.3 per cent with the Tunisian bourse down 13.2 per cent.
• The Australian sharemarket is close to the middle of the leader-board, largely unchanged over 2011, putting it in 34th spot. Still, after being broadly unchanged in 2010 as well, that means the sharemarket is still little different from where it closed at the end of 2009.

Interest rates, currencies & commodities

• The Australian dollar ended 2010 around US101.60c and it looks like ending the first quarter around US103c. That modest appreciation of 1.2 per cent ranks the Aussie dollar at 38th in our table of 120 currencies across the globe. So far in 2011, 59 currencies have strengthened against the US dollar, 28 currencies have been largely stable and 33 currencies have weakened.
• The strongest currency in the world so far this year has been the Paraguayan guarani (up 10.2 per cent) followed by the Hungarian forint (up 9.7 per cent) and Romanian lei (up 9.5 per cent). Interestingly eastern European and western European currencies dominate the top end of the leader-board. The Euro is 9th strongest against the greenback with a gain of almost 6 per cent with the UK pound up 3.7 per cent. At the other end of the leaderboard is the Vietnamese dong (down 7.3 per cent) followed by the South African rand (down 4.2 per cent) and Kenyan schilling (down 3.8 per cent).

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The index is based on historic and recent consumer attitudinal data collected by Genworth and shows homebuyer confidence across Australia has dipped by 1.5% since September 2010 – the second consecutive fall since the launch of the index last year.

“This fall, despite Australia’s relatively strong economic performance was driven by decreased confidence in the natural disaster affected regions of Queensland and Western Australia (WA) coupled with growing concern amongst Australian homebuyers about the rising cost of living,” said Genworth CEO Ellie Comerford.

Natural disasters hit Western Australia and Queensland sentiment

Disaster-impacted borrower sentiment in Queensland and WA was the primary driver behind the index fall, without which the index would have risen by 0.8%.

Queensland was by far the worst affected, with one in three Queensland respondents impacted by the natural disasters in some way, compared to a national average of 14%.

Genworth Hardship data reflects this trend. Total Hardship requests in early 2011 increased by over 70% compared to the same period last year and nearly half (40%) of these requests were natural disaster related.

Most of those affected by the recent natural disasters were fairly optimistic about the recovery with 60% expecting to recover in two months or less. However, one in five believes they will be affected for more than six months.

Awareness of Government relief programs was strong with most homebuyers (78%) aware of relief initiatives. Borrower awareness of lender hardship relief measures was lower at 39%, but over 60% of borrowers using lenders hardship initiatives were more than satisfied with the service and support they received.

“Genworth has worked with lenders to deliver hardship assistance in the wake of natural disasters, and is pleased to find the majority of people that used these solutions were satisfied with the outcomes.

However, flood affected borrowers are telling us they expect to struggle for longer and we are working with lenders to introduce more relief to affected borrowers in the longer term,” Ms Comerford said.

Mortgage stress increasing – Rising costs of living the biggest worry

Overall, the report findings show that debt levels did not change between September 2010 and March 2011 with 27% of Australians putting half or more of their monthly income to paying off debt. However, more borrowers across Australia experienced mortgage stress at 21%, up from 15% in 2010.

The causes of mortgage stress have shifted over the last six months, with borrowers now seeing the rising cost of living as the biggest hurdle to meeting repayments rather than interest rate hikes at 66% compared to 51% respectively.

“Expectations for a relatively stable interest rate environment contrast with soaring food and petrol prices, moving the rising cost of living to the front of borrowers’ minds,” said Ms Comerford.

First homebuyers more anxious about repayment ability

Despite some concerns that first homebuyers had over-committed to high debt levels while generous first homeowner incentives were available, this segment is faring well with above average levels of confidence. However, this result masks the fact one in three first homebuyers spend more than half their monthly income on servicing debt, compared to only 27% of average homebuyers.

Also a concern is first homebuyer outlook for the year ahead, with 24% expecting to find it difficult to meet repayments over the next 12 months compared to the national average of 19%.

“Although first homebuyers are confident, they are most concerned about interest rate rises in the coming year. This reflects the trend of rising property prices forcing them to take on bigger loans to realise their dreams of home ownership,” Ms Comerford noted.

Outlook

Despite an overall drop in borrower confidence and increased mortgage stress, more homebuyers are upbeat about the property market this year, with 38% of those surveyed viewing 2011 as a good time to buy a home (up from 25% in 2010).

However, homebuyers are pessimistic about their ability to repay their mortgages, with the rising cost of living and threat of future rate rises weighing heavily on their minds.

“Genworth will continue to provide the market with valuable insights into the attitudes and sentiment of homebuyers and would-be borrowers. We anticipate the effects of the recent natural disasters will continue to put downward pressure on borrower confidence over the coming six months,” Ms Comerford said.

Click here to download a full copy of the report.

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• The underlying budget deficit deteriorated in January and now stands just shy of record highs. In the 12- months to January, the budget deficit totalled $62.3 billion, an increase of almost $3.8 billion on the deficit for the 12 months to December. The record budget deficit was $63.3 billion for the 12 months to
• September 2010. CommSec estimates that the budget deficit equates to 4.6 per cent of GDP.
• The budget deficit of $40.7 billion for the seven months to January is also $2.1 billion above the “profile” or expected deficit for the period
• Over the next five months each monthly budget deficit needs to improve by over $4 billion compared with the equivalent months of 2010 ($20.8 billion in total) for the Government to meet its full year budget deficit target of $41.5 billion.
• In the past, the best improvement in the budget position over a six-month period in the past has been just $8.7 billion. Still, the biggest deterioration has been $37 billion. The target is not impossible, but still difficult given the slowdown of the economy and recent floods.
• Annual revenues dipped from seven-month highs in January but the good news was that annual expenses eased from record highs.

What do the figures show and what does it mean?

• The best way of tracking the budget position during the year is to follow the rolling 12-month totals. In that way seasonal influences and one-off effects can be accounted for. So the latest figures represent bad news for the Government. The deficit in the 12 months to January rose to $62.3 billion, just off record highs and a long way from the target of a $41.5 billion deficit in the 2010/11 year.
• Another way of looking at the deficit is to compare it with the profile – that is the estimate of where the deficit should be if the budget target is going to be met. In the 7 months to January the deficit stood at $40.681 billion, over $2 billion higher than the profile estimate of $38.504 billion.

• Whichever way you cut it, the Government has some work to do to hit the target. Clearly the floods in Queensland and Victoria have had an impact as has Cyclone Yasi in northern Queensland. And while the good news is that expenses are short of the profile estimate at present, the bad news is that revenue is falling short by an even bigger margin. It’s not just the floods but also the fact that the Reserve Bank adopted tight monetary policy settings late in 2010, serving to slow momentum in the economy.
• The government has plenty of work to do to hit its budget target. Basically for the next five months each monthly budget result needs to improve by almost $4.2 billion compared with the same month of a year ago. The annual budget deficit needs to improve by almost $21 billion in the space of five months to hit the Government target.
• The good news is that budget expenses in January were lower than a year ago. Annual budget expenses hit a record high of $353.4 billion in calendar 2010 but eased to $351.2 billion in the 12 months to January. The bad news is that budget revenues were lower than a year ago in January and annual budget revenues eased from seven-month highs.
• Annual budget revenues are up just 0.1 per cent on a year ago. By comparison annual expenses are 3.5 per cent higher than a year ago.
• GST revenues also slipped in January, a further sign that the economy has lost momentum. GST revenues totalled $47.4 billion over the 12 months to January, down from $47.6 billion in the years to November and December and below the record high of $47.9 billion in the year to October 2010. Annual GST revenues are still up a healthy 7.7 per cent higher than a year ago, no doubt a pleasing result for state and territory governments across the nation.

What are the implications for investors?

• So what does it all mean? The Federal Treasurer should advise whether the deficit target for 2010/11 is still likely to be met. That would clear the air and remove speculation. But no doubt the Treasurer will also give a commitment to hand down a very tight budget in May.
• The Federal Government is entirely committed to get the budget back into surplus. It will have to make hard decisions and reportedly this will take the form of a crackdown on welfare payments. Investors can also expect spending cuts in other areas and a possible freeze on public sector employment.
• The Government will also have to hope that the Reserve Bank does stay on the interest rate sidelines until the second half of 2011 so that the economy can motor out of the current soft patch. Consumers and businesses aren’t spending, and as a consequence margins are being constrained together with profitability and government tax collections.
• Given its minority status, the Government will have to show that it has the necessary strategy to improve the budget bottom-line or risk losing support of Independents. Certainly the Government has been thrown a curve ball from natural disasters, but it has to demonstrate that the budget numbers will start improving in the next few months.

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• Lending slumped in January. Total lending finance fell for the first time in the five months – down by 6.0 per cent in January. Lending totalled $52.6 billion in January, up 5.8 per cent over the year. Over the prior four months cumulative monthly gains in lending finance stood at 12.8 per cent.
• RBA Board on interest rate sidelines. The decision to leave interest rates on hold in March was due to an array of factors, however the key driver was the negative impact on the economy from the floods. The subdued level of consumer spending also provided Board members with further reason to hold off on near-term rate hikes.
• Australian new car sales recorded a modest 0.2 per cent rise in February.
• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 3.5 cents per litre to 142.7 cents a litre in the week to March 13 – a near 29 month high. Over the past month the national average price has lifted by 7.9 cents per litre.
• Brisbane has the highest petrol price across the capital cities, while Canberra is the lowest.
• The futures market has now priced in a 55 per cent chance of a rate cut at the April meeting in light of the Japanese nuclear crisis.

What does it all mean?

• Lending finance is a forward-looking indicator of economic activity – as any rise in borrowings will eventually translate to a pickup in spending and production. The floods are clearly complicating analysis of the lending data, but the continued softness of consumer borrowing remains a concern.
• In late 2010 there were tentative signs of thawing in the conservative attitudes of consumers and businesses. Lending finance had risen for four straight months prior to the sharp 6 per cent fall in January. The key issue going forward is: how long will the weakness last? Notwithstanding the floods, the Reserve Bank would clearly want to see some improvement in lending over February and March.
• The weakness in consumer borrowings is a major concern, especially given that personal finance has fallen for five out of the last seven months. CommSec expects the Reserve Bank is likely to stay on the interest rate sidelines – especially given that inflation looks to be well contained at present.

• The latest Reserve Bank Board minutes identified the Queensland floods as a key reason for interest rates remaining on hold in March. And as the Reserve Bank has noted on recent occasions, the lack of consumer activity is not all bad news – ensuring that inflationary pressures are contained in the near term. Even the recent slide in lending is unlikely to surprise the Reserve Bank, especially given that it was expecting growth to be sluggish in the first half of 2011.
• The minutes revealed that Board members were generally optimistic about the outlook, noting strength in business investment plans as well as the sustained improvement in labour market conditions. However given that interest rate were “mildly restrictive” – in other words acting to slow the Australian economy – a rate pause seemed the most logical outcome.
• After a modest pickup in activity in the mid part of 2010, car sales are now effectively going nowhere with more signs of buyer caution once again emerging. In annual terms vehicle sales are down almost 2 per cent on a year ago. The rate hikes of late last year are no doubt resulting in potential car buyers being more circumspect about future purchases. In fact in trend terms car sales have been broadly flat for the last ten months.
• What is required in the near term is for interest rates to remain on hold, allowing consumers and businesses to adjust to the higher interest rates now in place and, in turn, start spending again.
• Brisbane was hit hard by the floods and now it has the highest petrol price of any capital city. The lofty petrol price is clearly an impediment to economic recovery.

What do the figures show?

Lending Finance:

• Total new lending commitments (housing, personal, commercial and lease finance) fell by 6.0 per cent in January after rising 4.3 per cent in December. However over the prior four months lending was up a much healthier 12.8 per cent in cumulative terms. Lending totalled $52.6 billion in January, up 5.8 per cent over the year.
• All housing finance (owner occupier & commercial) fell by 4.8 per cent in January – the first fall in seven months.
• Commercial finance fell by 5.8 per cent in January. Within commercial commitments, fixed lending fell by 4.0 per cent while revolving credit slumped by 9.7 per cent. Commercial loans are up 13.9 per cent on a year ago.
• Personal finance fell by 9.5 per cent in January – marking the fifth fall in the past seven months. Within personal commitments, fixed lending fell by 4.5 per cent while revolving credit fell by 14.5 per cent. Personal loans are down 6.2 cent on a year ago.
• Lease finance fell by 1.3 per cent in January and loans are down 6.2 per cent over the year.

New car sales

• New car sales rose by 0.2 per cent in February after sliding by 2.4 per cent in January. Total car sales are down 1.5 per cent on a year ago.
• Passenger car sales fell by 2.7 per cent in the month, sports utility vehicles rose by 4.1 per cent while “other” vehicles (trucks, utes etc) were 4.2 per cent higher. In annual terms “other” vehicle sales were up 1.4 per cent on a year ago.
• In rolling annual terms, 236,260 SUV’s have been sold in the 12 months to February – the second highest reading on record. Overall SUV sales are up 4.6 per cent on a year ago.

Petrol prices:

• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 3.5 cents a litre to 142.7 cents a litre in the week to March 13. The metropolitan price rose by 3.7 c/l to 142.8 c/l, while the regional average price rose by 3.3 c/l to 142.6 c/l.
• Average petrol prices across states over the past week were: Sydney (up 4.5 cents to 143.2 c/l), Melbourne (up 3.5 cents to 142.2 c/l), Brisbane (up 4.9 cents to 145.6 c/l), Adelaide (up 1.6 cents to 141.1 c/l), Perth (up 2.7 cents to 141.5 c/l), Darwin (up 1.3 cents to 144.4 c/l), Canberra (up 3.3 cents to 137.3 c/l) and Hobart (up 1.4 cents to 145.5 c/l).

Minutes from the March 2011 Reserve Bank Board meeting

Consumer spending

• Retail sales data had shown subdued spending in late 2010, including a small fall in real spending for the December quarter. Liaison with retailers had suggested some improvement in conditions in early 2011, with sales data for January released during the Board meeting showing moderate growth in the month. Consumer confidence had softened in early 2011 to be only modestly above average levels, although it was difficult to determine how much of this decline was due to the floods and the cyclone.

Business conditions

• Most business surveys showed a deterioration in current conditions in January, and there was a substantial reduction in hours worked in Queensland. However, business confidence in late January had bounced back after falling in the previous survey taken in early January.

Employment

• There had been another solid rise in employment in January, with the unemployment rate remaining at 5 per cent. Forward-looking indicators of employment from surveys and liaison pointed to solid employment growth over the coming year. Wage growth had picked up over the second half of 2010, with the quarterly outcomes for the wage price index back at around their average rate for the 2005–2007 period. Wage outcomes had been stronger in the mining sector.

The decision

• Interest rates on loans were slightly above average, a level reached after the monetary policy decision taken in November 2010. Members judged that this mildly restrictive stance of policy continued to be appropriate. The Board therefore decided to leave the cash rate unchanged.

What is the importance of the economic data?

• 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.
• The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.
• 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?

• Overall the latest Board minutes suggest that the Reserve Bank has a degree of flexibility on the interest rate front. And while the near term domestic data looks patchy the Reserve Bank remains confident about the outlook.
• CommSec doesn’t expect a rate hike until at least May, however the risks are that the Reserve Bank will maintain stable rates for longer.
• Interestingly current futures market pricing indicates a 55 per cent chance of a rate cut at the April meeting in light of the Japanese nuclear crisis.

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• The outlook for home builders is gloomy. Council approvals to build news homes slumped by 15.9 per cent in January. In annual terms approvals are down 24.8 per cent on a year ago.
• The floods certainly played a part in the weak result but excluding Queensland new dwelling approvals still fell by 13.3 per cent in January.
• The all-important private sector new house segment fell by 2.4 per cent in January, holding at 22 month lows.
• Australia’s trade surplus narrowed by $143 million to $1,875 million in January – modestly above expectations. Australia has chalked up trade surpluses of $21.1 billion over just the past ten months.
• In February, 80,896 vehicles were sold, down by 1.6 per cent compared with a year ago. In seasonally adjusted terms CommSec estimates that sales eased 0.5 per cent in the month.

What does it all mean?

• The recent improvement in building approvals has certainly been short lived. After encouraging signs in December dwelling approvals have slumped by almost 16 per cent in January and in annualised terms approval are now down over 24 per cent on a year ago.
• It could be argued that the wet weather and in particular the floods in Queensland has been the key driver behind the weak result. Especially given that Queensland approvals fell by almost 30 per cent in January to the lowest level in records going back 28 years. But even if you exclude Queensland, approvals slumped by over 13 per cent. In fact approvals fell across all states in seasonally adjusted terms – highlighting the current weakness in housing activity.
• There is no doubt that the building approvals series tends to be volatile especially given that apartment approvals, tend to be lumpy. And it is important to note that the January figures are likely to be revised in coming months, given the flooding. However the ABS has highlighted “that flooding in the eastern states, particularly Queensland, and other recent natural disasters have not adversely affected participation by providers in the Building Approvals collection or the quality of estimates in this release”.

• And while revisions are likely to take place, it is clear that there is an underlying level of weakness in housing activity. Not only is overall building approvals plummeting but the all important private sector new house segment fell once again in January and is holding at the lowest levels in 22 months. No doubt the November rate hike is only starting to filter through the data and our concern is that the weakness could remain in play for the next few months.
• It is important to highlight that while the housing sector is cooling it is not about to collapse in a heap. Overall CommSec expects house prices to consolidate over the next few months, but for the year as a whole we would expect prices to lift by 5 per cent.
• The economy may be going through a soft patch but the dollars keep rolling in. Australia has now notched up its tenth consecutive trade surplus, totalling in excess of $21 billion. Despite the boost to Australian coffers the impact has yet to have a resounding effect on the economy. The weakness in business and consumer spending suggests the additional income is being saved rather than spent.
• However as the Reserve Bank has highlighted, increased savings will eventually mean a pickup in spending down the track. It is the multiplier effect that essentially the Reserve Bank is banking on to spur domestic growth over the coming year. At present the additional income is not being spent, but as the recovery gains traction it is likely that Australian businesses and consumers will follow through on spending and investment plans.
• More importantly, while the floods in Queensland have had a detrimental impact on coal exports it seems this has been partially offset by higher prices. And given the ABS did not encounter any significant issues in collating the data, any sizeable downgrade in the size of the surplus is unlikely to take place in coming months. Even more so, healthy surpluses are likely to be part of the landscape over coming months provided the weather doesn’t take an extreme turn for the worse.

What do the figures show?

Building Approvals:

• New dwelling approvals fell by 15.9 per cent in January, after rising by 10.0 per cent in December. Dwelling approvals are down 24.8 per cent on levels of a year ago.
• Excluding Queensland new dwelling approvals fell by 13.3 per cent in January.
• House approvals fell by 3.3 per cent in January (private sector down 2.4 per cent), after sliding by 0.4 per cent in December. Apartment approvals fell by 32.4 per cent in January (private sector was down 30.8 per cent) after rising by 27.4 per cent in December. In annual terms apartment approvals are down 24.8 per cent on a year ago.
• Dwelling approvals fell in all states with Tasmania (down 34.9 per cent) faring worst followed by Queensland (down 29.9 per cent) and South Australia (down 20.9 per cent) in January.
• In annual terms approvals across the state: NSW (down 37.5 per cent), Victoria (up 8.0 per cent), Queensland (down 46.2 per cent), South Australia (down 46.0 per cent), Western Australia (down 33.0 per cent), and Tasmania (down 36.2 per cent).
• The value of building approvals fell by 26.5 per cent in January and was lower by 28.0 per cent on a year ago.

International trade

• Australia’s trade surplus narrowed by $143 million in January to $1,875 million – marginally above expectations.
• Exports fell by 4.1 per cent while imports fell by 3.8 per cent. It was the tenth consecutive trade surplus.
• Rural exports fell by 1.5 per cent in January while non-rural exports fell by 8.4 per cent.
• Within non-rural exports, coal, coke and briquettes fell by 29 per cent. “On a revised recorded trade basis, between December 2010 and January 2011, large value decreases were recorded for the following selected commodities hard coking coal fell $713m (40 per cent) with exports to India down $230m (49%) and China down $149m (53%), driven by decreases in volumes of 47% and 49%, respectively. Semi–soft coal fell $230m (33 per cent). Bituminous (thermal) coal fell $75m (6 per cent.”
• Within rural exports meat and meat preparations fell by $82 million or 13 per cent.
• Within imports, consumer imports fell by 1.5 per cent in January, capital goods imports rose by 3.2 per cent while intermediate goods imports fell 11.0 per cent.
• While the physical trade of goods is in surplus, the services account remains mired in deficit – the deficit widened from $289 million to $377 million in January. The high Australian dollar is a key culprit, depressing tourism receipts.

Car sales:

• The Federal Chamber of Automotive Industries reported that 80,896 new cars were sold in February, down 1.7 per cent on a year ago. Passenger car sales were 5.0 per cent lower than a year ago, 4WDs were up 4.7 per cent and “other vehicles” (trucks, utes etc) were up 1.3 per cent. 0.5.0 per cent in February.

What is the importance of the economic data?

• 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.
• 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.
• The Federal Chamber of Automotive Industries release figures on new car sales at the start of each month. The data is useful in gauging consumer spending behaviour.

What are the implications for interest rates and investors?

• The strength of the Australian dollar continues to have a detrimental impact on the services sector. Australia’s has notched up its 16th consecutive services deficit. The Aussie dollar strength is making Australia a less attractive destination for overseas tourists and potential international students. Interestingly when the Aussie fell below US70c in 2009 the services sector notched up a series of surpluses.
• While the housing sector is cooling it is not about to collapse in a heap. The fundamental for property remain attractive. Population growth remains healthy, vacancy rates continue to slide and the employment growth will support activity in the mid to longer term.
• The rate hikes have certainly taken their toll on the housing sector over the past year and unfortunately for the sector it is unlikely that a turnaround is going to take place anytime soon. Overall CommSec expects house prices to consolidate over the next few months, but for the year as a whole we would expect prices to lift by 5 per cent.

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• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 1.2 cents per litre to 136.3 cents a litre in the week to February 27 – a fresh 28 month high.
• Motorists are likely to see a further increase in petrol prices. While the Singapore unleaded price rose by more than US$8 a barrel, it has only partially filtered through to the terminal gate (wholesale) price – which gained 3 cents a litre in the past week. CommSec expects pump prices to rise by a further 4-5 cents a litre in the next fortnight.
• The TD Securities-Melbourne Institute monthly inflation gauge rose by just 0.2 per cent in February. Excluding volatile items, prices were up just 0.1 per cent – the seventh straight month of negligible growth.
• Private sector credit rose by 0.3 per cent in January to stand 3.4 per cent higher than a year ago.
• Capital city home prices fell by 1.6 per cent in seasonally adjusted terms in January after rising by 0.3 per cent in December according to the RP Data-Rismark Hedonic Australian Home Value Index – the largest property database in Australia. Outside capital cities, prices fell by 1.2 per cent in January.
• Company profits fell by 2.8 per cent in the December quarter. Profits rose in just four of the 15 industry sectors. However sales rose in ten of the 15 industry sectors in the December quarter with aggregate sales up by 0.9 per cent. Inventories (stocks) held by businesses rose by 0.7 per cent in the December quarter in inflation-adjusted terms.

What does it all mean?

• All the data released today points to a soft economy that does not need any further interest rate hikes in the near term. Inflation remains well under control, consumers and businesses are still refusing to borrow, house prices are recording modest falls and the sustained rise in petrol prices will add further pressure to household budgets – further slowing down spending.
• After largely going sideways for the last month pump prices have resumed their upward trajectory. Petrol prices are now holding at fresh 28-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 has resulted in the Singapore unleaded price surging by over US$8 a barrel in the past week. And given that the Australian dollar was largely unchanged, the entire increase in the global oil price will need to filter through to domestic pump prices.

• Already the terminal gate price (wholesale) has started to react rising by a sizeable three cents a litre in the past week. But a further increase in the wholesale prices will take place over the rest of this week and given the lag effect motorists should see the impact on petrol signboards around Australia early next week. CommSec expects prices to increase by 4-5 cents a litre in the next fortnight, taking the national average price to above $1.40 a litre. At the high point of the discounting cycle petrol will be trading at well above a $1.50 a litre.
• The latest TD inflation gauge suggests that inflation remains well and truly under control at present. In February prices rose by 0.2 per cent. Interestingly the rise in fruit and vegetable prices may be the first indication of the impact from the floods. But strip out volatile elements like fruit and vegetable prices, and petrol and inflation is largely non-existent in Australia. Over the past seven months inflation has been negligible and the annualised core result is holding at a more sedate level of 2.3 per cent. Even the three month annualised rate of inflation is amazingly just 0.3 per cent.

• The latest lending data adds further weight to the view that interest rates should remain on hold in the near term. Overall lending ticked higher but the sub components suggest that activity levels are still shaky. Business credit fell for the seventh straight month, while consumer borrowings were unchanged after sliding in the prior month, and housing credit ticked modestly higher. Even within housing credit, lending to home owners continued to slide, with the annual growth rate at the weakest levels since records began 20 years ago.
• Australian home prices have completed a soft landing. In March 2010, prices were seemingly going gangbusters with annual growth standing at 14.1 per cent. But home prices are now tracking at just a 1.2 per cent annual rate – the slowest growth rate in 23 months and well below the long-term average pace of 8.0 per cent.
• The rate hikes delivered over 2010 have taken the heat out of the housing market, while the wet weather conditions has also added another degree of weakness to the result. Property prices across Australia fell by 1.6 per cent in January however it is important to highlight that sales volumes were less than 50 per cent of a typical months flows.
• It is likely that housing conditions will remain soft in the near term, however the long term fundamentals certainly look more attractive. The Reserve Bank is likely to remain on the interest rate sidelines in the near term, while healthy jobs growth, rising population and sliding rental vacancy rates will support housing activity in the medium term.

What do the figures show?

Petrol prices:

• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 1.2 cents a litre to 136.3 cents a litre in the week to February 27. The metropolitan price rose by 1.0 c/l to 136.1 c/l, while the regional average price rose by 1.3 c/l to 136.6 c/l.
• Average petrol prices across states over the past week were: Sydney (up 2.1 cents to 136.6 c/l), Melbourne (up 0.9 cents to 135.2 c/l), Brisbane (up 0.1 cents to 137.7 c/l), Adelaide (up 1.1 cents to 134.7 c/l), Perth (up 0.2 cents to 135.6 c/l), Darwin (up 1.3 cents to 139.0 c/l), Canberra (down 1.7 cents to 133.7 c/l) and Hobart (up 0.3 cents to 141.0 c/l).
• Today, the national average wholesale (terminal gate) stands at a 28-month high of 130.0 cents a litre, up 3 cents a litre over the past week. The wholesale price has been hovering around 126-127 cents a litre since late January 2011.
• Last week, the key Singapore unleaded petrol price rose by US$8.67 (7.9 per cent) to US$118.77 a barrel – a 30 month high. And in Australian dollar terms the Singapore gasoline price rose by $8.47 (7.8 per cent) over the week to $117.20 a barrel.

Inflation gauge:

• The monthly inflation gauge rose by 0.2 per cent in February after lifting by 0.4 per cent in January. The annual rate of inflation rose from 3.4 per cent to 3.6 per cent.
• Excluding volatile items like petrol and fruit & vegetables, the inflation gauge rose by 0.1 per cent after remaining unchanged for the two prior months. The annual rate of core inflation remained steady at 2.3 per cent. The threemonth annualised rate of inflation rose eased from 0.4 per
  cent to 0.3 per cent.
• TD Securities noted that “Contributing most to the overall change in February were price rises for fruit and vegetables, meat and seafood, and automotive fuel. These were offset by a sharp seasonal fall in holiday travel and accommodation, and a fall in rents. The price of fruit and vegetables rose by 5.1 per cent in February, following the 12.1 per cent rise in January. Excluding a grocery chain milk price discount war, the Inflation Gauge rose by 0.3 per cent.”

Private sector credit

• Private sector credit (lending) rose by 0.3 per cent in January after rising by 0.2 per cent in December. Credit growth is up 3.3 per cent on a year ago.
• Housing credit grew by 0.6 per cent with lending to owner-occupiers rising by 0.5 per cent and investor housing up 0.6 per cent. Housing credit is up 7.3 per cent on a year ago – the weakest annual growth in 18 months. Owner occupier housing credit is up 7.0 per cent on a year ago – slowest pace in records going back 20 years. Investor housing lending was up 7.9 per cent on a year ago.
• Personal credit remained flat in January after sliding by 0.4 per cent in December. Personal credit was up 0.8 per cent over the year – still well below the rate of inflation. Business credit fell for the seventh straight month in January, easing by 0.2 per cent. Business credit is down 2.4 per cent on a year ago and has been consistently contracting for the past 19 months.

House price prices

• The RP Data-Rismark Hedonic Australian Home Value Index fell by 1.6 per cent in seasonally adjusted terms in Janaury after a 0.3 per cent rise in the previous month.
• House prices fell by 1.0 per cent in the month while apartments fell by 2.2 per cent.
• Capital city home (dwelling) prices are up 1.2 per cent on a year ago, the slowest growth rate in 23 months. House prices are up 0.9 per cent and apartment prices are up by 2.1 per cent.
• Prices rose in just one of the seven capital cities in January with Darwin prices up 3.3 per cent. Across the other cities prices fell most in Melbourne (down 2.3 per cent), followed by Sydney and Brisbane (down 1.8 per cent), Canberra (down 1.6 per cent), Perth (down 1.5 per cent), Adelaide (down 0.7 per cent). In Hobart, prices rose by 2.1 per cent in December (January data not yet available).
• Home prices are higher than a year ago across all capital cities except Perth (down 4.1 per cent), Brisbane (down 3.5 per cent), and Canberra (down 0.6 per cent). Prices are up most in Darwin (up 4.7 per cent), followed by Melbourne (up 3.8 per cent), Sydney (up 2.6 per cent), and Adelaide (up 2.2 per cent).
• January home prices aren’t available yet for Hobart. In the year to December, home prices in Hobart were up by 2.2 per cent.

Business indicators

• Company gross operating profits fell by 2.8 per cent in the December quarter. Profits now stand 14.7 per cent higher than a year ago.
• Profits rose in four of the 15 industry sectors, led by Financial and insurance service (up 201.6 per cent), Administrative and support services (up 26.9 per cent), and Accommodation & food services (up 8.5 per cent), Mining profits fell by 8.5 per cent following the 1.6 per cent fall in profits in the September quarter.
• Excluding the financial and insurance sector, profits fell by a much larger 4.6 per cent in the quarter.
• Profits fell 10.6 per cent in construction.
• Sales rose in ten of the 15 industry groupings in real (inflation-adjusted) terms in the December quarter. Of the major sectors, sales rose 1.4 per cent in accommodation and food services. Sales fell by 4.1 per cent in Rental, hiring & real estate services, and by 1.4 per cent in Mining.
• In real terms, aggregate sales rose by 0.9 per cent in the December quarter.
• In nominal terms sales fell most in December quarter in both Queensland (down 2.5 per cent). Sales rose most in both Victoria and South Australia (up 1.6 per cent) followed by Western Australia (1.4 per cent).
• Inventories fell in three of the six sectors, with overall stocks up by 0.5 per cent. Mining stocks fell by 3.5 per cent with retail trade up 0.7 per cent. Utilities fell 6.0 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 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.
• Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.
• The RP Data-Rismark Hedonic Australian Home Value Index is based on Australia’s biggest property database covering more than 340,000 sales during 2010. Unlike the ABS Index, which excludes terraces, semidetached homes and apartments, the RP Data-Rismark Hedonic Index includes all properties.
• The monthly RP Data-Rismark Hedonic Index compares month-to-month index results. Quarterly results are measured comparing end months rather than averaging each month in the quarter. For example, the first quarter of 2009 index results would compare the end of March index with the end of December index.

What are the implications for interest rates and investors?

• It is clear that rising petrol prices will boost the inflation rate in coming months. 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.
• Businesses are still cutting debt at a faster rate than new loans are being taken out. Overall this is a good reason to remain cautious on the outlook for the economy.
• Home prices are off the Reserve Bank’s worry list – at least for now. A softening in home prices combined with the prospect of interest rates remaining unchanged until mid year is clearly positive for budding home buyers.

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• Lending rose in December. Total lending finance rose for the fourth consecutive month up by 2.4 per cent in December. Lending totalled $54.9 billion in December, up 4.1 per cent over the year but up a much healthier 10.5 per cent in the past four months.
• The Government’s commodity forecaster has downgraded its crop forecasts. ABARES has revised lower its forecast for the 2010/11 winter crop by 2.5 per cent. The flooding on the east coast was the driver behind the modest downgrade.
• While the latest forecast has been downgraded, ABARES still tips a record wheat crop with production up 20 per cent on a year ago.
• RBA Board on interest rate sidelines. The decision to leave interest rates on hold in February was due to an array of factors. The floods are expected to slash growth in the near term, while the subdued consumer spending and the lower-than-expected inflation outcomes have provided Board members additional time to assess economic conditions.

What does it all mean?

• 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 fourth straight month with healthy growth of over 10 per cent in that period.
• No doubt a longer term historical view suggests that it is still early days. The pickup in activity is off a low base and in annual terms the growth rate is not looking overly flash at just 4.1 per cent. More importantly the weakness in consumer borrowings is still a major concern, especially given that consumer finance has fallen for four out of the last six 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. CommSec would expects the Reserve Bank is likely to stay on the interest rate sidelines – especially given that inflation looks to be well contained at present.

• The release of the latest Reserve Bank Board minutes have highlighted that the weakness in consumer activity was a key factor in rates remaining on hold in February. And as the Reserve Bank has noted on recent occasions the lack of consumer activity, is not all bad news ensuring that inflationary pressures are contained in the near term. Even the Governor admitted at his testimony to parliament that “it is a difficult  environment for retailers. But not entirely unwelcome in the current circumstances” – given it would be harder to avoid the economy overheating if all sectors of the economy were firing.
• The minutes revealed that Board members were generally optimistic about the outlook, noting upward revisions to the near term outlook for Australia’s terms of trade and sustained improvement in labour market conditions. However given that interest rate were “mildly restrictive” – in other words tapping the breaks on the Australian economy – a rate pause seemed the most logical outcome. CommSec expects rates to remain on hold until mid year.
• Despite the devastating natural disasters, the Government’s chief commodity forecaster still believes that Australia will produce a record wheat crop this year. Overall ABARES has revised lower its forecast for 2010/11 winter crop production by a relative modest 2.5 per cent as the excessive rainfall flooding in the Eastern states were partially offset by an increase in the production estimate for Western Australia and South Australia.
• As always, conditions are far from uniform across the country but the outlook for the summer crop is also decidedly positive with cotton farmers to be amongst the key beneficiaries of abundant irrigation and higher prices. Overall there will be more money in the rural economy over the coming year, courtesy of the breaking of the drought – boosting the outlook for retail, manufacturing and services businesses in regional centres.

What do the figures show?

Lending Finance:

• Total new lending commitments (housing, personal, commercial and lease finance) rose by 2.4 per cent in December after rising 1.6 per cent in November. Lending totalled $54.9 billion in December, up 4.1 per cent over the year but up a much healthier 10.5 per cent in the past four months.
• All housing finance (owner occupier & commercial) rose by 2.5 per cent in December, the fourth straight monthly gain.
• Commercial finance rose by 3.3 per cent in December. Within commercial commitments, fixed lending rose by just 0.5 per cent but revolving credit surged by 9.7 per cent. Commercial loans are up 7.7 per cent on a year ago.
• Personal finance fell by 0.2 per cent in December – marking the fourth fall in the past six months. Within personal commitments, fixed lending fell by 0.4 per cent while revolving credit fell by 0.1 per cent. Personal loans are up 4.1 per cent on a year ago.
• Lease finance slumped by 8.7 per cent in December and loans are down 10.8 per cent over the year.

ABARES Crop Report:

• The Australian Government’s commodity forecaster, ABARES, has revised lower its forecast for 2010/11 winter crop production by 2.5 per cent to 42.1 million tonnes (Mt). The crop is now seen 19 per cent higher than 2009/10. ABARE highlighted that “Downgrades were applied to New South Wales, Victoria and Queensland, largely as a result of the widespread excessive rainfall and some flooding in late 2010 and early 2011. This
  decrease has been partially offset by an increase in the production estimate for Western Australia and South Australia, where harvest results have been better than earlier expected.”
• ABARES has also lifted its forecast for summer crop production by 66 per cent to 4.8Mt. Production of the summer crop in 2010/11 is expected to be the highest in nine years. Cotton production is tipped to soar by 117 per cent in 2010–11, to 839 000 tonnes, with reductions from floods in Queensland more than offset by higher production in New South Wales. ABARES notes that “High cotton prices and abundant supplies of irrigation water in most cotton growing regions” are the key driver of what will result in the largest Australian cotton harvest on record.

• ABARES expects that wheat production will hit a record high of 26.3Mt in 2010/11, up 20 per cent on the previous year. However the forecast is around 1.9 per cent lower than ABARES December forecast largely due to the extreme weather conditions on the east coast. Similarly Barley production is estimated to rise by 18 per cent to 9.3 million tonnes (5 per cent downgrade to December forecast) and canola production is estimated at 2.1 million tonnes (5 per cent upgrade on previous forecast) – 11 per cent higher than last year.

Minutes from the February 2011 Reserve Bank Board meeting

Consumer spending

• Members discussed developments in the household sector, where the restraint in spending was continuing despite solid growth in household income. Data on retail spending in October and November were soft and liaison suggested that this had continued for most of December.
  

Business conditions

• Another large LNG project in Queensland had received final investment approval in January and conditions in the resources sector remained positive. More broadly, overall business conditions in late 2010 were at around average levels, though there were significant differences across sectors. Non-residential construction remained weak. Business credit outstanding continued to contract, although other forms of external financing were growing.
  

Employment

• The labour market remained strong, with employment increasing by nearly 60,000 over November and December, and the unemployment rate falling to 5 per cent. Employment was estimated to have grown by 3.3 per cent over 2010. Forward-looking indicators of labour demand, including job vacancies and hiring intentions, continued to point to solid employment growth and some further tightening in labour market conditions.
  

The decision

• Given the medium-term outlook for the economy, and the limited amount of spare capacity that existed, members judged that this slightly restrictive policy stance remained appropriate. The continuation of subdued growth in consumer spending and the lower-than-expected inflation outcomes provided additional time for the Board to assess at future meetings the evolving balance of risks to both output and inflation.

What is the importance of the economic data?

• 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.
• 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 Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.

What are the implications for interest rates and investors?

• Overall the latest minutes provide the Reserve Bank a degree of flexibility on the interest rate front. And while the near term domestic data looks patchy the Reserve Bank remains confident about the outlook. CommSec believes that interest rates are unlikely to be raised until May.
• Our CBA equity analysts indicate that GrainCorp is likely to benefit from the higher grain prices and volumes “East coast grain volumes are the far more important to GNC than rising grain prices, but higher global grain prices will continue to support east coast grain exports over the next 12-18 months. Farmers usually respond to high grain prices and GNC will also likely benefit from a 3-5% increase in crop planted area on the east coast for FY12 (planting in May-June).” Our analysts still have recommended a hold rating for Grain Corp.
• Of other stocks in the sector the analysts note: “Ridley Corporation (RIC) remains our preferred exposure in Food & Agribusiness sector and is set to benefit from strong protein demand as a result of herd rebuilding, and ample feed grain supply over the next two years. Strong rainfall / flooding over the past few months – while has negatively impacted both 1H11 and 2H11 overall – is a significant medium-term positive for all stockfeed demand (incl. supplementary feed). The FY12-13 outlook is strong for both AgriProducts and Salt divisions.”

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• The Westpac/Melbourne Institute index of consumer confidence rose modestly in February following the sharp slide in January. The index rose by 1.9 per cent to 106.6 in February.
• In trend terms confidence levels have been falling for the past five months and are holding at the lowest levels in 20 months.

What does it all mean?

• The improvement in the latest consumer sentiment reading is certainly a welcome sign, particularly considering the sharp slide in the prior month. The modest bounce in sentiment levels can be put down to a whole host of factors but the receding floods, and cyclone Yasi avoiding significant damage in major population centres, would have to be the key drivers.
• The destruction wreaked by the floods and cyclone no doubt had a profound effect on all Australians. However given the backdrop of a stronger Australian dollar, rising equity markets, sliding unemployment and the Reserve Bank leaving interest rates on hold, it could be argued that sentiment levels would have jumped sharply had the natural disasters not taken place.
• Overall it’s hard to argue that sentiment levels are upbeat or buoyant at present, especially when you look at the raw data across gender, with both male and female respondents actually noting a slide in sentiment levels. Even across the three age categories sentiment levels fell by an average of 3.5 per cent. The seasonality of the data seems to be the clear driver of the latest improvement. Even in trend terms confidence levels have been falling for the past five months and are holding at the lowest levels in 20 months.
• Looking forward retailers will still need to discount in the near term but it is likely that the worst is behind – especially for some of the Queensland retailers. The other good news is that it is looking more likely that the Reserve Bank Board will be sitting on its hands until mid 2011. Interest rates are already modestly restrictive and there are good grounds to argue that the last move to a tighter monetary policy was a little premature. The Reserve Bank would be best served by allowing confidence and spending to repair. The strength in the labour market is also a positive and likely to drive spending in the midterm.

What do the figures show?

Consumer sentiment

• The Westpac/Melbourne Institute index of consumer sentiment rose by 1.9 per cent in February to 106.6 after sliding by 5.7 per cent in January. The index is now down 8.9 per cent on a year ago.
• The current conditions index fell by 1.2 per cent, while the expectations index rose by 4.1 per cent.
• Four of the five components of the index rose in February:
  • The estimate of family finances compared with a year ago fell by 4.4 per cent;
  • The estimate of family finances over the next year rose by 1.4 per cent;
  • Economic conditions over the next 12 months was higher by 1.1 per cent;
  • The measure of economic conditions over the next five years rose by 10.2 per cent;
  • The measure on whether it was a good time to buy a major household item edged up by 0.8 per cent.

What is the importance of the economic data?

• Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.

What are the implications for interest rates and investors?

• The rate hikes over the past year are having a profound impact on consumer spending patterns. The housing sector is cooling while businesses continue to highlight weak trading conditions. CommSec believes that the next interest rate hike is unlikely to take place until mid 2011.
• Looking forward, it is clear that Aussie consumers are holding on to their conservative attitudes and any further talk of rate hikes will be detrimental to modest improvements in levels. Interest rates need to remain on hold for an extended period to tempt consumer to part with their cash.
• Retail discounting will continue to be a theme in coming months to generate consumer buying interest. However the outlook for retailers is likely to modestly improve as construction activity levels pick up. In particular the massive rebuilding phase that will take place in Queensland will boost spending across an array of sectors.
• Our retail equity analysts have reiterated the buy recommendation on Myer. “The stock is now trading at a around a 20 per cent discount to the ASX200 industrials compared to the retail sector and at a 15 per cent discount to market and is now reasonable value on the downgraded earnings base.”

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