Month: July 2013

Australian CPI for Q2 2013

The latest CPI figures for the June 2013 quarter were released by the ABS last week. The headline growth figures were slightly lower than reported in the previous quarter;

  • All groups CPI grew by 0.4% for the June 2013 qtr. (versus 0.4% in the Mar 2013 qtr.) and by 2.4% year on year
    • Growth in the previous qtr. Mar 2013 was 0.4% and 2.5% year on year
  • On a seasonally adjusted basis, all groups CPI grew by +0.5% (versus +0.1% in the Mar 2013 qtr.) and by 2.3% year on year
    • Seasonally adjusted growth in the CPI in the previous qtr. Mar 2013 was 0.1% and 2.5% year on year

Source: ABS 

Whilst the headline figures are reported in the media, there are two other measures of inflation that are reviewed by the RBA – the weighted median and the trimmed mean. The CPI is made up of a basket of household goods & services. Prices of items in that basket are sometimes subject to short term volatility eg; fruit & veg, which can distort the view of the underlying inflation trend. The trimmed mean and the weighted median are measures used to ascertain the underlying inflation trends. For the June 2013 qtr;

  • Trimmed mean (15% of the smallest & largest price movements are removed or ‘trimmed’) +0.5% quarter on quarter and +2.2% year on year
  • Weighted median (price change at the 50% percentile by weight of the distribution of price changes) +0.7% quarter on quarter and +2.6% year on year

Interesting that this month, the two measures of underlying inflation are moving to either side of the spectrum (red & green lines in the chart above). The trimmed mean is pointing to reduced price pressures and sitting at the lower end of the RBA’s 2-3% target range and the weighted median shows a stronger uptick in core inflation and continued rise in the trend (let’s see that little nugget raised in the media). So what does that mean? I read an interesting post that deals with this very issue. Coincidently, it was the only other post to raise the issue of the difference between the two measures of underlying inflation in the data released by the ABS. Basically, the trimmed mean is the better of the two measures and this is what the RBA prefers to look at as a guide to underlying inflation. The RBA paper covering this issue can be viewed here.

Based on the trimmed mean, inflationary pressures in the economy continue to weaken. In its own words, the RBA makes the link between weakening aggregate demand and reduced pricing pressure. This, together with a raft of other weak economic data, will likely pave the way for further interest rate cuts.

The main contributors to CPI changes during the June 2013 quarter were housing, health, clothing & footwear and alcohol & tobacco.

Source: ABS 

Over the full year to June 2013, housing, health and alcohol & tobacco were the main contributors to CPI change.

Source: ABS 

From these two charts it’s clear that housing (purchase of owner occupied dwellings, rents & utilities) & health care continue to be a source of price pressure in the economy (as well as alcohol & tobacco). The June qtr. reading on clothing & footwear is quite different to the annual trend – possibly due to a weaker $AUD? The impact of movements in the dollar is yet to be fully seen in the CPI.

We can gain further insight into the CPI by looking at the breakdown between tradeable and non-tradeable items/categories. This provides some insight as to the extent to which price changes are attributable to domestic factors (changes in labour costs, productivity) or international factors such as exchange rate movements or changes in supply and demand in overseas markets. Again, this is another way to gauge the source of pricing pressures in the economy. A brief explanation of the two measures is below;

  • Tradeable component – items whose prices are largely determined on the world market (approx. 40% of CPI by weight). Items are classified as ‘tradable’ if imports or exports represent at least 10% of supply of an item. The ‘total supply’ of an item is domestic production plus imports
  • Non-tradeable component – the remaining categories (60% of CPI by weight)

What I think is interesting about this view of the CPI is that it shows some pockets of pricing pressure in Australia. Annual growth in the non-tradable component is now running at 4.3%.

Source: ABS

This high level of non-tradeable inflation is off-set by the very low print (and continued decline) within the tradeable categories of -0.7% year on year. I’ve broken down each of the categories into their smaller component parts to get an understanding of which categories are driving price changes.

Tradeable – those items whose prices are largely determined on the world market (approx. 40% of CPI by weight). There are 47 sub categories in the tradeable group.

Source: ABS 

This is the contribution to CPI year on year which gives you exactly that – how each sub category contributes to the total growth in prices. An important point is that not all categories are weighted the same. In the case of tradeables, auto fuel, motor vehicles, tobacco and international travel and accommodation are the four largest categories, accounting for 30% by weight. Auto fuel and motor vehicles have been the major contributors to price declines over the last year (the largest by weight, but not the largest % change in prices). In the audio visual category, which is only 3% of the tradeable index, prices are down -12% year on year – one of the largest price decreases.

The question now is what impact does the recent decline in the $AUD have on these categories (given they are import/export exposed)? No doubt cars & auto fuel will likely see price increases as a result of a weakening $AUD. A good example is Qantas now increasing its fuel levy and airfares as a result of lower dollar and higher fuel charges (based in USD). The question is, to what degree will the other categories be impacted by a weaker $AUD? Tradeables are more likely (than non-tradeable) to be a larger source of price pressure as the $AUD weakens and this should become evident in the next quarter of data. But there are also competitive factors at work that could see prices, such as food, remain subdued. As long as the major retailers continue to battle it out for market share and sales (with subdued demand), prices may remain lower, possibly squeezing the margins of manufacturers/distributors further (via higher import costs). Higher prices (via imports) may result in decreased spending, especially in the more discretionary categories.

Non-tradeable – the remaining categories (60% of CPI by weight). As mentioned earlier, non-tradeable have been the key driver of price pressure in Australia.

Source: ABS 

The top four categories by weight are new dwelling purchases by owner occupiers, rents, medical and electricity. They account for 35% of the non-tradeable price index. It just so happens that electricity and medical also recorded the highest % price increase year on year. Rents and dwellings are growing above the average as well, which is driving the higher contribution of these two categories. But it’s the overall distribution of price growth that is also impacting non-tradeable inflation; 55% of the non-tradeable categories are growing faster than the average, but these 22 categories represent 64% of the index by weight. I would argue that it’s not higher labour charges that are responsible for the higher prices of the top four categories. Pricing pressure in these four categories is likely to remain, especially as the RBA cuts interest rates and irrespective of movements in the $AUD.

The policy response expected by the RBA is to continue to lower interest rates. Prices, overall, are edging lower, suggesting weakening aggregate demand. Will lower interest rates be enough to stimulate demand?

There are several points about the impact of lower interest rates:

1) The recent spate of interest rate cuts has started to break the back of the persistently high $AUD. Whilst good for exports (and local manufacturers and employment), it will increase the price of imports – I’d expect to see greater impact of a lower $AUD in the tradeable categories. As mentioned earlier, in an environment of subdued demand, there could be greater margin pressure placed on businesses that feel they cannot pass though price increases without seeing a fall in sales.

2) Lower interest burden on mortgage holders – this will reduce pressure on disposable income, affecting approx. 34% of households that have a mortgage (and countless others with interest-only investment property loans). Conversely, there are households (the number unknown) that also rely on interest income. A cut in rates will reduce the income of these households (and the savings rate has been going up). You would hope that it would balance out in the economy as a net increase in disposable income (it’s unclear that’s what will happen) leading to an increase in aggregate demand.

3) It’s likely that this cycle of rate cuts has kept demand for housing finance and hence real estate prices high (mostly via investors). This impacts all home owners by maintaining prices. But this will continue to keep the non-tradeable price growth high as well (new dwellings and rents are large components of the non-tradeable price increase). High levels of domestic household mortgage debt and deteriorating employment will act as headwinds to greater growth in house prices.

4) Lower interest rates have not yet appeared to stimulate investment spending in most quarters of the economy – this is one to keep an eye on.

Employment & Output by Industry in Australia

There are four key themes in our business and economic news at the moment. In no particular order;

  1. The state of manufacturing in Australia
  2. The shift from the mining investment boom to the mining export boom
  3. Impact of the strong $A on Aussie business, especially manufacturing, exports and retail
  4. The housing market

Are these issues receiving a disproportionate amount of airtime? To what degree is our economic performance really tied to these industries? Frequent and emotionally charged media coverage can influence our perception of just how big some issues really are. So it’s time for some context.

I thought that it would be helpful to post the breakdown of employment & output by industry in Australia to understand the relative size and importance of each sector.

Whether you look at these issues through the lens of employment or output, industries such as manufacturing, mining, retail and housing are important to our economic wellbeing. There are a few surprises too.

Employment by Industry

These first two charts look at total employment by industry (in actual 000’s of persons) and how much that employment has changed over the last year (growth/decline in 000’s of persons).

Source: ABS, 6291 – latest data is Feb 2013

Change in Employment by Industry

Source: ABS, 6291 – latest data is Feb 2013. 

The employment figures have moved a lot over the last three months, but this data will give a good sense of the relative size of employment by industry.

Top five (5) Australian industries by employment; Health Care, Retail Trade, Construction, Manufacturing and Education.

Health Care & Social Assistance – our largest industry by employment size, it accounts for 12% of total employed and was one of the largest gainers in total employed over the last year with +35k persons growth. From an output perspective, it represents approx. 6% of output (gross value added or GVA). Output growth in the sector has also been well above real GDP growth +6.5% (second fastest growth industry behind mining).

Retail Trade – accounts for 10% of total employed, with growth of +12k persons over the last year. From an output perspective, retail trade accounts for a smaller 4% of total GVA/output. Growth in output is just above growth of real GDP at +3.5%. From an aggregate perspective, this isn’t a bad result. Given the issues facing retail and the performance of key retailers, I fully expected to see both employment & output share declining. It’s possible that one or two states could still be keeping the aggregate numbers higher. This will be the focus of another post.

Construction – accounts for approx. 7.3% of total employed and employment in this industry is still growing year on year by +11k persons. The red flag is output – construction is the 4th largest industry by output/GVA and output is growing well below real GDP at +1.4%. This is possibly a sign of the times with mining investment, & investment generally, slowing down and reduced public sector investment spending.

Manufacturing – The exception to the employment growth story was manufacturing. Currently the 4th largest industry by employment, manufacturing employment declined year on year at Feb ’13. The decline in manufacturing employment appears much smaller than I would have expected on a year on year basis (-3k persons), given the seemingly constant reports in the media and the poor Performance of Manufacturing Industry (PMI) reports. The most recent PMI reports do point to an improvement in manufacturing – potentially linked to a lower Australian dollar.

Over the last ten years, the number of persons employed in manufacturing as at February has averaged 1.024m. As at Feb 2013, employment in this sector is at 954k, or -7% below the ten year average. Total employed in manufacturing as a share of total employed persons in Australia has consistently declined since the early 80’s;

Source: ABS 

The decline in manufacturing employment share of total employment is not a recent thing (see chart above). This means growth in manufacturing jobs has not kept pace with total employment growth during this entire period. This is evident when you look at the raw numbers of persons employed in manufacturing;

Source: ABS

Between 1984 and the end of 2007 total employed in manufacturing bounced around above one (1) million in a reasonably consistent manner. From the end of 2007 we start to see a pronounced declined in actual total persons employed in manufacturing.

It’s hard to have one blanket reason why employment in manufacturing is falling in Australia –lack of competitiveness (including dollar movements), greater automation of previously labour intensive tasks and/or lower demand (especially post GFC). But even now at 8% of people employed in Australia, manufacturing is still a very important industry. From an output perspective, manufacturing is our 5th largest industry, accounting for 7% of total GVA/output. But that output declined year on year by -1.4%. Similarly, the share of manufacturing output to total GDP has more than halved since 1974. As a share of exports, manufacturing represents approx. 10% (year to Mar ’13, chain vol, seas adjusted), so again, a reasonably significant amount.

Education – is the 5th largest industry by total employment, employing just over 900k persons. It’s also been one of the fastest growing in terms of employment growth with +43k persons employed over the last year. From an output perspective, education accounts for approx. 4% of total output/GVA, but growth has been well below real GDP growth at +2%. This is potentially a red flag for future employment in the industry.

Employment has grown on an annual basis in all of the top five industries except manufacturing. From recent posts on employment, we also know that PT employment is growing faster than FT and it’s likely that service-based industries such as retail trade, education and health care could be driving this growth in PT jobs.

What the top 5 industries look like in terms of share of total employment;

Source: ABS

The decline in manufacturing share of employment is clear. The two most significant gainers in employment growth have been in the Construction and Health Care industries.

What’s missing in this list is mining. Whilst the data suggests it’s a small proportion of total employed (2.2%) there are two things to consider. One is that mining is relatively concentrated in two/three key states – WA, QLD & NT. Secondly, the total numbers quoted here under ‘mining’ don’t take into consideration the impact on the support industries such as science, engineering, transport, construction etc. No doubt the mining investment boom has required greater value added resources from other sectors in the economy. As the shift moves from investment to export focus there is likely to be an impact (negative) on employment and wages.

Output by Industry – Share of Real GDP

This set of charts looks at Australian industries by their share of real GDP and their growth in output (as measured by Gross Value Added). This will provide a sense of just how important some industries are to the total output of our economy. When combined with the employment data, we can ascertain the importance by output and employment.

Source: ABS

Change in Output by Industry

Source: ABS 

The top five (5) Australian industries by output – as measured by share of real GDP – mining (adding exploration & support services), financial services, ownership of dwellings, construction and manufacturing. These top five industries accounted for a whopping 41% of total real GDP over the last year.

Mining – is our number one industry with 10% share of real GDP. A recent RBA paper on the Industry Dimensions of the Resources Boom suggests that mining share of output is closer to 18% when the value added of industries that provide inputs to resource extraction and investment, such as business services, construction, transport and manufacturing are included. Output growth is the highest of all industries with growth of 9% (when mining is combined with exploration – exploration is only approx. 0.8% of output). From an export perspective, mining (metal ores & minerals, coal, coke & briquettes, other mineral fuels and metals ex non-monetary gold) represents 66% of total goods exports (for the year to Mar 2013, chain vol, seas adjusted). Despite accounting for such a large share of output and exports, share of employment is much lower at 2% (higher if you include support industries of course). Growth in employment was +6.5k persons over the last year, which still paints a reasonably rosy picture of the state of the mining industry. Most recent figures show a distinct uptick in unemployment in WA and indeed, the employment numbers point to a recent decline in total employed persons in mining;

Source: ABS 

On the back of lower export prices, mining profits have been declining. Major infrastructure & new mining projects have also been cancelled. For the moment, export volumes remain strong although slower growth in the Chinese economy is expected to impact those exports in the future. As the shift moves towards export rather than investment, and in light of falling prices, the focus in the industry will be to minimize costs in order to boost profitability. All these factors could combine to result in slowing exports, reduced investment, lower salaries and less employment associated with mining. This is not a good outlook for our biggest industry by output and exports.

Financial Services – accounts for 9.6% of GVA and has been growing at well above real GDP at +4.3%. Despite that, employment has declined over the last year by -13k persons. The industry accounts for 3.5% of employed persons.

Ownership of dwellings – In the system of National Accounts “owner-occupiers of dwellings, like other owners of dwellings, are regarded as operating businesses that generate a gross operating surplus (GOS). The imputation of a rent to owner-occupied dwellings enables the services provided by dwellings to their owner-occupiers to be treated consistently with the marketed services provided by rented dwellings to their tenants. Owner-occupiers are regarded as receiving rents (from themselves as consumers), paying expenses, and making a net contribution to the value of production which accrues to them as owners. GOS for ownership of dwellings is derived as gross rent (both actual and imputed) less operating expenses (but before the deduction of consumption of fixed capital). An estimate of GOS for dwellings owned by sectors other than households is deducted to obtain GOS for dwellings owned by persons.” (Source: ABS)

So our ownership of dwellings accounted for 7.5% of National output and is growing at just below real GDP at 2.7%. Note that this imputed value doesn’t net out outstanding debt associated with those assets. Ownership of dwellings isn’t an industry that increases the productive capacity of the economy (of course, unless you are building new dwellings etc.) or drive productivity improvements. But it does give you an idea of just how big ownership of dwellings is in our economy. The Australian economy has become more and more reliant on trading established dwellings for greater and greater value, and all the while notching up greater and greater debt within the economy.

According the latest Census data (2011) 67% of households are owner-occupiers;

Source: ABS Census 2011

This is made up of 34.9% who ‘own’ with a mortgage and 32.1% who own their homes outright (for a total of 67%). In the 1996 Census, 66.4% of households were owner occupiers where 25.5% ‘owned’ with a mortgage and a much higher 40.9% owned their home outright. There has been a clear shift to more people owning with a mortgage = greater debt. This does not include any investment property data.

Construction – It’s one of our largest employers as well as one of our largest industries by size of output (see earlier comments). Share of total GVA hasn’t really changed all that much over the last 40 years. Construction has gone from 6.8% share of real GDP in 1974 to 7.2% share in Mar 2013, hitting a peak of 7.5% share in June qtr. 2011. The AIG Construction Outlook is for lower growth in construction. This is already playing out in the most recent output & employment data.

Manufacturing – although still a large proportion of our total output and employment, manufacturing in Australia has been declining in importance for many years, aided in part by the dismantling of various tariffs. If we can’t compete on the world stage (or even our own stage) without subsidies, then should we even be in that that industry? Couldn’t those resources currently tied up in manufacturing be used in more productive endeavours? For an interesting discussion on the importance of manufacturing, see full article here. It suggests that;

“Productivity is the key to national standards of living. Only through productivity growth do we sustainably increase our competitive advantage, capital formation, incomes and employment. Manufacturing accounts for a huge slice of productivity potential in all economies. Without it, any economy will struggle to generate long term high productivity growth. Mechanisation, improved processes, innovation and technical progress are the bread and butter of productivity growth. They simply do not exist to the same extent in services, nor, for the most part, in mining (though the runoff in the boom will be good for the next few years)” (source:

From an export perspective, manufacturing represents just over 10% of goods exports (for the year to Mar 2013, chain vol, seas adjusted) – made up of machinery, transport equipment and other manufactures. This is only slightly down from its high of 14% in the June 08 qtr. As a share of total goods exports, manufacturing had grown steadily until the GFC. If share of local manufacturing has been declining, then it’s likely that locally made goods are being substituted for imports (for various reasons). Some of the hardest hit local manufactures have been in textiles & clothing;

Source: ABS 

Overall, our top five industries by output do in fact tie in with the central themes of manufacturing, mining and housing. Unfortunately, it’s not all positive. The decline in manufacturing share is prominent, but then so is the growth in share of mining & finance.

Source: ABS 

So there are at least three key industries in Australia that account for a high proportion of output, employment and/or exports – mining, construction and manufacturing. The outlook for these three sectors is not particularly positive;

  • Our (re)new(ed) PM, Kevin Rudd has bravely claimed the end of the resources investment boom. What lies ahead for mining is unclear. Exports are forecast to remain strong, but that mostly hinges on what happens to Chinese demand.
  • The RBA is looking to construction to fuel the next leg of growth in Australia. But where will that construction investment come from? Housing? Household mortgage debt is already high and this doesn’t improve the productive capacity of the economy anyway. Business? Well, mining investment appears to have peaked and non-mining investment has been flat and is forecast to decline slightly. Public? Public investment is unlikely in the face of government tightening, unless there is a major push behind a stimulus package.
  • Manufacturing is the other major industry that accounts for a large share of output and employment. For the moment, it seems that as a country we are happy to continue to let this industry slide despite the potential productivity benefits that could be delivered.