National accounts

• 

  Australian economy continues to gather pace.

  Another quarter of growth: The record-breaking economic expansion is in its 23^rd year. The Australian economy grew by 0.8 per cent in the December quarter after a 0.6 per cent increase in the September quarter (forecasts centred on a 0.7-0.8 per cent rise). The economy has grown 2.8 per cent over the past year, only modestly below the decade average growth rate of 3.0 per cent.

• Contribution to growth: The biggest contributions to growth came from net exports (+0.6 percentage points) followed by household consumption (+0.4pp), inventories and public investment (both +0.2pp) and government consumption (+0.1pp). The biggest drag on growth was non-dwelling construction (-0.2pp).
• States & territories: The best description of the performance of States and Territory economies is state final demand plus net exports. The Northern Territory had the fastest quarterly growth in the December quarter (up 5.7 per cent), followed by Queensland and Tasmania (both up 0.8 per cent), Victoria and Western Australia (both up 0.7 per cent), NSW (up 0.6 per cent), the ACT (up 0.1 per cent) and South Australia (up less than 0.1 per cent).
• Industry sectors: Just seven of the 19 industry sectors contracted in the December quarter.
• Productivity: Gross value added per hours worked in the market sector rose by 1.0 per cent in the December quarter – the strongest growth in almost two years. Annual productivity growth stands at 1.8 per cent.
• Household spending: Only three of the 17 sectors recorded weaker spending in the quarter. Household spending rose by 0.8 per cent in the December quarter (strongest gain in seven quarters) and by 2.6 per cent over the year. Clothing & footwear rose by 3.0 per cent but Communications fell the most, down by 2.0 per cent.

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• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 0.5 cents per litre to 143.2 cents a litre in the week to March 20 – a near 29 month high.
• Over the past five weeks the national average price has lifted by 8.4 cents per litre – marking the biggest five weekly gain in two years. Given rises in regional prices there is still risk of a modest lift to petrol prices in the coming fortnight
• In seasonally adjusted terms imports rose by 6 per cent in February. The rise in imports was largely due to the sharp increase in global oil prices. The fuels and lubricants component rose $561m (26 per cent) in February. CommSec expects a trade suplus of $1.5 billion for February.
• The average household is now forking out $200 a month to fill the car up with petrol – an increase of $25 in just the last four months.
• Across capital cities Canberra motorists are paying the highest price for petrol at almost a $1.49 a litre. In contrast Adelaide has the cheapest prices by a huge margin with the average price at $1.35 a litre.

What does it all mean?

• The cost of petrol continues to be the topic of conversation around the water cooler and it is not surprising given that the national average petrol prices has surged by almost 13 cents a litre in the space of 10 weeks and is now holding at fresh 29-month highs. In fact since mid January the weekly national price has only fallen in just once.
• The political instability in the Middle East and North Africa is the key driver of near term prices. And given the military strikes on Libya over the weekend, and escalating unrest in the region, the global oil price is likely to remain volatile – and as such have a further bearing on domestic pump prices.
• Interestingly the debate about oil companies taking advantage of the current turmoil, and lifting petrol prices well above the norm, can be put to rest. Over the past five weeks the wholesale (terminal gate) price has risen by nine cents a litre, while the retail pump prices has risen by a similar 8.4 cents a litre, suggesting that the hike in retail prices is in line with what is taking place on a global front.
• Most of the gains in the wholesale price have filtered through to domestic petrol prices, however looking forward, it is unlikely that motorists are likely to get a reprieve in coming weeks. Over the past week the Singapore unleaded price has jumped by a further $2 a barrel (exacerbated by the weakness in the Australian dollar) and this will be reflected on petrol signboards around the country.

• CommSec expects pump prices to increase by a further 2 cents a litre in the next fortnight, taking the national average price to around $1.45 a litre.

What do the figures show?

Petrol prices:

• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 0.5 cents a litre to 143.2 cents a litre in the week to March 20. The metropolitan price rose by 0.1 c/l to 142.9 c/l, while the regional average price rose by 1.2 c/l to 143.8 c/l.
• Average petrol prices across states over the past week were: Sydney (up 0.3 cents to 143.5 c/l), Melbourne (up 0.2 cents to 142.4 c/l), Brisbane (up 0.3 cents to 145.9 c/l), Adelaide (down 6.1 cents to 135.0 c/l), Perth (up 1.5 cents to 143.0 c/l), Darwin (up 1.9 cents to 146.3 c/l), Canberra (up 11.3 cents to 148.6 c/l) and Hobart (up 0.6 cents to 146.1 c/l)
• The national average wholesale (terminal gate) hit a fresh 29-month high of 135.4 cents a litre on March 15, having since eased by 1.1 cents a litre to 134.3 cents today.
• Last week, the key Singapore unleaded petrol price rose by US$1.08 (0.9 per cent) to US$121.90 a barrel. And in Australian dollar terms the Singapore gasoline price rose by $2.23 (1.9 per cent) over the week to $122.70 a barrel.

Merchandise imports

• Imports rose by 6 per cent in seasonally adjusted terms in February according to the Australian Bureau of Statistics. Intermediate goods rose by 12 per cent while capital goods rose by 2 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 ABS figures on imports refer to physical goods such as cars and computers. The figures are not adjusted for seasonal effects. The data is useful in highlighting the strength of consumer and business spending and gives some guidance as to the likely trade position in the month. But analysis can be clouded by currency changes.

What are the implications for interest rates and investors?

• The lift in the price of petrol is further bad news for motorists, taking precious spending dollars out of consumer pockets. Retailers already have to contend with the effects of the weather on seasonal spending, consumer conservatism and higher utility prices.
• The rising fuel prices are likely to entrench the current conservative behaviour of consumers. Our equity analysts are maintaining HOLD recommendations for both Woolworths and Wesfarmers.

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The big picture

• One of the biggest issues currently is rising food prices. Food prices began rising in the second half of 2010 and hit record highs in January. The United Nations Food and Agriculture Organisation has recently released its February data and the food price index hit fresh record (20 year) highs in both real and nominal terms, up 2.2 per cent in the month. All of the component price indexes were higher in the month, except sugar, which fell slightly.
• The FAO expects that a combination of higher global demand and lower supply will lead to a fall in global cereal stocks, underpinning the sharp lift in prices recorded over the past year. Over the past year the FAO estimates that export prices of major grains have lifted by 70 per cent.
• At face value, record grain prices don’t seem to be supported by the drop in coarse grain stocks. While expected to fall by almost 16 per cent in 2010/11, stocks hit 8-year highs last year. But given that demand for grains has been soaring, lifting to record highs, it is important to look at grain stocks as a proportion of consumption. In 2010/11, stocks are expected to fall to 18.6 per cent of consumption, not far off the 30-year low of 16.6 per cent in 2006/07. Consumption has risen 22 per cent over the past decade versus a 18 per cent lift in production.
• Now for those in developed or advanced nations, tight grain supplies and record prices is a concern, but hardly a big deal. In the US, food represents just 7 per cent of household spending. In the UK this proportion stands at 9 per cent while food is 11 per cent of household consumption in Australia.
• But in developing nations, the issue of rising food prices is far more significant. Even in the second largest economy – China – food represents 33 per cent of household spending. More broadly across Africa and Asia food holds between 30-50 per cent of household consumption.
• So it understandable that record food prices have led to unrest across the developed world. And when you combine that with young populations that are more likely to agitate for change, widespread access to social media and autocratic governments, you have a volatile mix. According to the United Nations, around 60 per cent of people in North Africa and the Middle East are under the age of 30 whereas the proportion is closer to 40 per cent in Western Europe, the US and Australia. In Australia, 41.2 per cent of the population is under 30 and the proportion is expected to keep falling for the next 40 years.

The week ahead

• After two solid weeks of ‘top shelf’ economic indicators, the calendar thins out somewhat over the coming week. The highlight is probably the release of minutes from the last Reserve Bank Board meeting, but there are also some key lending figures that bear watching.
• On Monday the Reserve Bank releases the January data on credit card lending and debit card transactions. Consumers still remain very cautious about going into debt with the average credit card balance just 1.9 per cent higher than a year ago – below the rate of inflation.
• On Tuesday the Reserve Bank releases minutes of the March 1 Board meeting while figures on car sales and lending finance are released the same day. Reserve Bank Assistant Governor Guy Debelle also delivers a speech but it is unlikely to provide direction for investors or traders. And the Board minutes will merely confirm that interest rate settings are on hold with members preferring to assess more information before deciding the next move.
• Car sales were largely flat in February – we tip a 0.5 per cent decline. And there will be keen interest as to whether the recovery in lending finance continued in January. However if the weak housing finance figures are anything to go by, the recovery in lending probably stalled in the latest month.
• On Wednesday the December quarter data on dwelling starts (commencements) is released. In the September quarter new starts slumped by 13.2 per cent and the pronounced slide in building approvals since April and the recent drop in construction loans to 2-year lows points to softer activity ahead.
• On Thursday, detailed labour force data is released with the latest estimates of employment by industry to be released. And the Reserve Bank releases its quarterly Bulletin on Thursday but there are no indications as yet what articles it will contain. Usually they cover a broad range of topics and provide fresh insights into Reserve Bank thinking on the broader economy.
• Turning our attention overseas, a solid schedule of US economic data awaits investors over the coming week with inflation being the highlight. On Wednesday new figures on business inflation (producer prices) will be released while consumer price data is issued on Thursday. Investors have grown used to seeing core gauges of prices (excludes food and energy) rising by 0.1 per cent each month, but it’s entirely possible that both the PPI and CPI core measures lifted 0.2 per cent in February, indicating that inflation has bottomed.
• The other event of note is the meeting of Federal Reserve policymakers (FOMC) on Tuesday. No change in rate settings or the amount of ‘quantitative easing’ is expected but the commentary should show that policymakers are more positive on prospects for the economy.
• In terms of the other data releases, the Empire State manufacturing survey is released on Tuesday together with trade prices and January data on capital flows.
• On Wednesday, figures on housing starts accompany the data on producer prices as well as the December quarter current account figures. Economists expect a correction in housing starts in February – down by 2.5 per cent to a 580,000 annual rate after the out-sized 14.6 per cent gain in January. Harsh winter weather has been playing havoc with construction but overall starts are still bumping along the bottom.
• On Thursday, data on industrial production, the leading index and the Philadelphia Fed survey are released alongside the figures on consumer prices. A healthy 0.6 per cent lift in production and solid 0.8 per cent gain in the leading index will confirm that the economic recovery is in good shape.

Sharemarket

• In 2010, there was the ‘funk’ caused by European debt, now global sharemarkets are fearful of a geopolitical contagion in North Africa and the Middle East. The last geopolitical contagion affected Asia in 1997 – a financial crisis characterised by speculative attacks on currency markets. At the heart of the issue were concerns about the health of banking systems and debt levels especially in Thailand, South Korea, Malaysia and Indonesia.

This time around the issue is more about politics – with people across North Africa and the Middle East expressing their concern that their governments are not doing enough to deal with soaring food prices. Across the region around 60 per cent of people are aged below 30 and they are agitating for change. The key concern with the Africa/Middle East crisis is that oil production could be disrupted. Just like the European Debt worries of 2010, it is fear that is causing sharemarket wobbles than actual fundamentals. The world is actually well supplied with oil and OPEC members say they are prepared to lift production quotas if necessary.

Interest rates, currencies & commodities

• On commodity markets, gold and oil prices are dominating attention due to fears of a widening in the Middle East crisis. The risk for investors is that when the situation in Libya is resolved, then oil and gold prices may retreat just as quickly as they lifted. But there are also a few other commodities that bear watching at present as well. Wheat and corn prices have eased in recent days on the potential for better crops in the US and eastern Europe. If production were to lift markedly, pushing down grain and food prices, disquiet in the Middle East would ease.

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• A host of economic figures have been released over the past week including the latest national accounts data – the most comprehensive assessment of the Australian economy. So what shape are we really in?
• Economists have been known to put some “spin” on the figures, influenced by their long-held views on variables like interest rates and exchange rates. We don’t have such pre-dispositions – we are more interested in the facts, and more importantly the implications for investors.
• Overall, it’s clear that the Australian economy is in good, but not great shape. The outlook is encouraging with unemployment and inflation at low levels, and China buying up our resources. But the outlook is not without its risks – high oil prices, Middle East contagion (remember the Asian contagion in 1997?), European debt, rising global inflation and a China bust.

Click here to download this document (pdf)

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• Australia’s record economic expansion is now well into the 20th year. The Australian economy grew by 0.7 per cent in the December quarter, after lifting by a downwardly revised 0.1 per cent in the September quarer (originally reported as growth of 0.2 per cent). Annual economic growth held steady at 2.7 per cent.
• For the calendar year 2010 the economy grew 2.6 per cent in 2010, below 15-year average of 3.25 per cent.
• The biggest contribution to growth came from the change in inventories (+0.8pp), followed by household consumption and government investment (both +0.2pp).
• Eight of the 19 industry sectors contracted in the December quarter. The strongest contributions to growth came from Professional, scientific and technical services, Administrative and support services, and Arts and recreation services.
• The data is entirely consistent with surveyed evidence and what we are hearing from businesses across the country. The Reserve Bank has previously indicated that it is comfortable with current interest rate settings and there is nothing in today’s result that is likely to see a shift from that view.
• A more accurate description of the performance of States and Territory economies is state final demand plus net exports. The Northern Territory (up 5.4 per cent), had the fastest growth in the December quarter, followed by South Australia (up 3.0 per cent),and Western Australia (up 1.6 per cent). Growth was weakest in Queensland (down 1.5 per cent).

Click here to download this document (pdf)

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• Aussie consumers are making fewer trips in the car but travelling more on planes and trains. And while we are spending more on little luxuries like shoes, sheets, pillows and sporting goods, we are cutting back on the so-called ‘sinful’ pleasures of gambling, alcohol and cigarettes. Welcome to New Australia.
• The record 3.1 per cent drop in spending on telecommunication goods and services like mobile phones and the internet over the past year is of concern to the government given the push for the National
  Broadband Network.
• The latest trends in consumer spending were gleaned from unpublished Bureau of Statistics data on household spending provided to CommSec.

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

• The latest detailed data on consumer spending has provided new insights into consumer behaviour. Aussies are cutting back on so-called ‘sinful’ indulgences like alcohol, cigarettes and gambling. At the same time we appear to be using our cars less often, or going for shorter journeys with spending on petrol down sharply. But while we seem to be in our cars less often, travel on trains and planes has increased markedly over the past year.
• In real (inflation-adjusted) terms, spending on petrol fell 5.2 per cent in the year to September – the biggest decline in 25 years of records. The 3.1 per cent fall in spending on telecommunication goods and services was also a record, perhaps suggesting that Australia is reaching saturation point for goods like mobile phones.
• Spending on gambling slumped 4.6 per cent over the past year with cigarettes & tobacco falling 2 per cent in response to higher prices, while spending on beer, wines and spirits was down 1.4 per cent.
• The 40 per cent lift in spending on computers reflects lower prices and government incentives. And spending on cars rose 13.5 per cent over the past year in response to cheaper prices. Increased global competition by auto-makers and the stronger Aussie dollar have been key influences driving car prices lower.
• Just like their US cousins, Aussie consumers have adopted a “barbell” strategy on their spending. At one end of the scale, consumers have been cutting back on goods that were previously considered to be spending mainstays like alcohol, gambling and mobile phones. But consumers have sought to reward themselves for their discipline and cost cutting by spending on little luxuries like shoes, sheets, pillows, digital cameras and short domestic flights or getaways.
• Not only are Aussies spending more on shoes and pillows, but visits to cafes and restaurants lifted by 5.5 per cent in real terms over the year.
• Spending on domestic air travel leapt by 11.7 per cent over the past year while hotel accommodation rose by 8.8 per cent. Clearly tour operators may bemoan the absence of foreign tourists, but perhaps they need to lift marketing to the domestic market. Certainly more Aussies seem to be jetting interstate for long weekends – perhaps shopping excursions in Melbourne, or fun-in-the-sun weekends on the Gold Coast.
• Also in the ‘little luxuries’ column is spending on “personal care” – a category that covers a range of items – with real spending up 6.2 per cent over the year.
• At the other end of the scale, visits to the doctor (down 0.1 per cent) and dentists (down 1.2 per cent) have been on the outer over the last year according to the latest spending figures while spending on food was up just 1.6 per cent in real terms, well below the 3.2 per cent lift in total household spending.
• The conservative nature of our spending behaviour has also been on show in the 5.2 per cent lift in outlays on insurance and financial services over the past year, including a 4.5 per cent lift in motor vehicle insurance.
• How long this new age of conservatism continues remains to be seen. But for now, Aussie consumers are making very specific choices, trimming what, in the past, may have been regarded as essentials – gambling, alcohol, cigarettes and trips in the car – in preference for the occasional little luxury of a weekend away, new ring or bracelet or watch.
• The data from the Bureau of Statistics is available in nominal and real (inflation-adjusted) terms. We have focussed on the real measures for this analysis.

Implications

• Some consumers look at the rising cost of utility bills or their monthly rent or mortgage payments and feel that they have no alternative but to cut back on spending in other areas. Interestingly it is previous mainstays like beer, wine, cigarettes and gambling that have been in the firing line. Many have probably concluded that they have over-reacted and have found room in the budget for little indulgences. Others have merely sought to reward themselves for taking the ‘hard’ decisions.
• Whatever the rationale, consumers are very selective about purchases, are more active in budgeting, doing comparison shopping and scouring for bargains. Retailers remain under pressure in this environment.

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