The Economy: Still Mixed, But The Investment Boom Powers On

As we once again approach a monthly Reserve Bank board meeting, the Australian economy is not providing any guidance for the central bank, or individuals.

The RBA board meets next Tuesday in Perth. On Wednesday Governor Glenn Stevens speaks at a dinner in Perth.

Both his post-board meeting statement and the speech will be closely watched for signs of any change in the RBA's current stance of waiting to see what happens in the economy.

Consumer and business confidence levels remain weak, but that is at odds with some of the July figures now emerging.

Complicating matters next week is the release of the June quarter economic growth figures on Wednesday with some early forecasts around the 0.9% (GDP contracted by 1.2% in the March quarter).

The Australian unemployment data is out next Thursday and some economists reckon the 5.1% rate will be pushed higher.

It wouldn't surprise if there's a change in market sentiment against an interest rate cut in a week's time.

Retail sales for July showed a surprising rise of 0.5%, stronger than most forecasts, but industry spokespeople dismissed the rise as a one-off.

And official figures out yesterday confirmed the investment boom remains on track and if anything is accelerating.

Earlier in the week July figures on new home building were very weak, building approvals fell for private dwellings (the major part of approvals each month), house prices fell and RBA data showed home lending was running at close to all time lows in July.

But so far, there's no single figure that points to a rate cut being a certainty next Tuesday.

So the next really important RBA meeting is the Melbourne Cup day meeting in November when the RBA will have the September quarter inflation data available to consider.

The new private investment figures from the Australian Bureau of Statistics were the most important figures released this week.

The report showed that firms planned to invest a record $149 billion for the year to June 2012, led by the mining sector which alone intended to invest a staggering $82 billion.

And June quarter investment was up a very sharp 4.9% to $33.8 billion.

The overall actual spend in 2010-11 looks like finishing down a bit on earlier estimates - a near 4% fall from the March survey estimate to a still very large $119.7 billion.

Spending on plant and machinery grew 2.2% in the June quarter, which will give the second quarter growth figures a nice boost next week.

The figures saw AMP's chief economist, Dr Shane Oliver remind us that investment data "simply confirms what we already knew... i.e. that the mining investment boom is very strong and still gathering steam.

"Interestingly though while June quarter investment growth was stronger than expected capital spending plans for 2011-12 imply a slight downgrade from previous estimates from growth of around 38% to growth of around 36%.

"Within this mining investment growth is still estimated to be a very strong 70%, but investment intentions imply growth of just 6% in the manufacturing and "other" sectors.

"In other words the two speed economy remains alive and well."

But more importantly, first quarter investment spending was revised up sharply, as more data from flooded parts of Queensland became available.

Overall business investment grew 7.7% in the March quarter, compared with an initially reported 3.4%.

For that reason the 1.2% fall in GDP in the March quarter could be hauled back in revisions in next Wednesday's national accounts.

And together a significant revision to the March quarter and a solid rise in the June quarter could change perceptions about the economy.

And planned manufacturing investment is much stronger than the headlines suggest.

Manufacturing is planning a 10.5% boost, to $13.1 billion of investment in the 2011-12 financial year.

That's also 7.4% more than the $12.2 billion estimated to have been spent in 2010-11 and about the average of the past five years, which belies much of the recent talk in the media and from some sections of manufacturing.

The mining industry is close to 10% of the economy and will grow thanks to the huge investments in iron ore, coal and liquefied natural gas.

The mining industry's $82.1 billion in investment plans in 2012 is 55% of the total, but appear to be plateauing while other industry's capex intentions are growing.

Mining capex intentions were flat from the March to the June quarters, while total capex spending estimates were up 6.2%.

Retailing, which is certainly doing it tough, plans to invest $4.13 billion this year, down just $64 million on last year - all but steady after some rough months.

But July wasn't as rough as many had forecast.

The Australian Bureau of Statistics said the 0.5% rise in retail sales in July came after a fall of 0.1% in June.

Spending grew by 1.2% in department stores in July and 1.1% at cafes and restaurants while food retailing rose 0.8%.

But clothing, footwear and personal accessories took a hammering with a 4.2% fall, and homewares were flat for the month.

NSW led the way with a 1% rise in retail sales, seasonally adjusted, in July, its first increase since February.

Sales rose 0.3% in Victoria, 0.8% in South Australia, Tasmania and the Northern Territory, while in WA they rose 0.7%.

Sales fell 0.2% in July in Queensland.

Dr Oliver said yesterday: "While retail sales rose a nice 0.5% in July, this may be just another bounce (like the 1% rise recorded in April) against a continuing weak trend.

"Retail sales are up just 1.4% from July last year and are likely to remain weak going forward reflecting the recent plunge in consumer confidence, increasing job losses and continuing rises in prices for necessities such as electricity, rent and government related charges.

"So there is nothing in today's data to change our view that the next move in interest rates will be down, before Christmas."

Meanwhile Australian manufacturing continues to do it tough with the Australian Industry Group and PricewaterhouseCoopers Performance of Manufacturing Industry survey for August falling 0.1 to 43.3 from 43.4 in July.

The survey showed that only two of the 12 manufacturing sub-sectors, food and beverage and clothing and footwear, posted increases in activity in August.

The decline in activity was most pronounced in the paper, printing and publishing, textile, fabricated metal and miscellaneous sectors.

To illustrate the latter, building products maker CSR Ltd said yesterday it is shutting says manufacturing lines in Melbourne, with redundancies, and restructuring its Viridian glass business to cope with the challenging business environment.

The cuts and changes have been forced on the company by a deterioration in commercial and residential construction, together with strong Australian dollar, which is impacting the performance of Viridian.

And we had more evidence this week of the malaise in the Australian housing sector.

After Tuesday's weak building approvals (especially for private housing), Reserve Bank figures on Wednesday showed home lending at a new all time low in July and the RP Data Rismark survey revealed yet another monthly fall in prices.

The fall in lending backs up the small fall in new private house approvals which have fallen 18% from their peak in 2010 and have fallen for the past 10 months.

The Reserve Bank's private lending data for July showed that the annual growth in home loans was the slowest on record.

Home loans increased by 0.4% in July taking the annual growth rate down to 5.9%, the slowest since records began in 1976 and a long way from the double-digit pace common in early 2008 and before.

A year ago, housing credit was growing at an annual rate of 8%, so the drop has been substantial.

Owner-occupied housing loans grew 0.5% in July and investor loans by 0.3%, both close to the lowest recorded.

In fact investor housing loans have shown no growth for the past five months and owner-occupied housing has been trundling along in the 0.4%-0.8% monthly range for much of the past year.

On an annual basis, owner-occupied lending has slowed from 8.3% in July of last year to 6.2% this July. Investor housing loans were growing at an annual 7.3% a year ago against the 5.2% in July.

And the RBA data showed household borrowing for personal use, such as on credit cards, fell 0.3% in July, while overall private-sector credit rose 0.2%, after a 0.1% drop in June.

That left total credit up 2.7% in the year to July, unchanged from June's rate (and down from the 3.1% growth in the year to May). A year ago private credit was growing at 3.2%.

Credit has been subdued for months now as households choose to save more and borrow less, which is hurting retailing as well as housing.

But not travel and car purchases which have remained fairly buoyant (in fact it would be more correct to say offshore travel is booming).

Australians now save over 11% and that figure will be updated in next week's second quarter national accounts.

Business credit was flat in July (better than the 0.7% fall in June) and the annual rate improved to minus 1.9%, from minus 2.4% in June.

But the annual rate had been as low as minus 0.8% in the 12 months to last March, so the position in July was nothing to get excited about.

And house prices are getting cheaper (and affordability improving) according to the latest data from the RP Data Rismark survey.

The RP Data-Rismark Hedonic Home Value Index fell 0.6% in July, seasonally adjusted, the seventh straight monthly fall in national home values.

That left home prices in Australia's capital cities down 2.9% over the past year.

In a further sign of soft market conditions, the average time it takes to sell a capital city home has risen to 55 days from 45 days a year ago.

Canberra and Darwin posted firms gains in July while Adelaide and Perth retreated.

Prices in Sydney, the country's biggest property market, rose 0.1%.

House prices in regional markets fell by 0.7% in July, for a decline of 2.4% for the 12 months.

In the 12 months to July 30, home prices fell 6.6% in Brisbane, 6.3% in Perth and 4.3% in Melbourne.

Home values fell most sharply in the premium housing sector, which has lost 6.2% this year, compared with a 2.1% drop in the cheapest suburbs.

And the big sell off in commodities last month, and the Australian dollar's weakness, didn't impact commodity prices, as measured by the Reserve Bank's Commodity Price Index.

The Australian dollar Aussie fell for the month, with the rate against the greenback falling from $US1.0954 on July 31 in Sydney, to $US1.0691 on Wednesday.

The trade weighted index fell from 78.1 to 76.5, according to Reserve Bank figures.

Copper prices fell more than 6%, oil prices were down 7%, other metal prices also weakened. Gold rose, but importantly iron ore and coal prices (which are not subjected to market trading) didn't move.

In fact the small fall in the value of the dollar probably help limit any losses for the index.

The Reserve Bank said that the preliminary estimates for August indicate that the index rose by 0.4% (on a monthly average basis) in SDR terms, after rising by 1.8% in July (revised). (See graph below)

It was originally reported as a rise of 0.9% in July in SDR terms.

"The largest contributor to the rise in August was a strong increase in the price of gold, while prices for crude oil and the base metals fell," the RBA said.

In Australian dollar terms, the index rose by 3.6% in August, the bank said.

Over the past year, the index has risen by 25% in SDR terms.

"Much of this rise has been due to increases in iron ore, coking coal and thermal coal export prices.

"With the appreciation of the exchange rate over the year, the index rose by 13 per cent in Australian dollar terms," the RBA added. (10% in the year to July, so the slight weakening in the dollar last month had a favourable impact on the index).