GDP top-line looks better than it really is – Sept 2015

The GDP result for the September quarter came in ‘better than expected’. In real terms, the economy grew by 0.9% in the Sept qtr and +2.5% for the year. This is historically low growth, but given the scope of the adjustment currently underway in the Australian economy, it’s not a bad result.

This is a case though where the ‘better than expected’ top-line result isn’t representative of the underlying performance. Our latest growth figures were mostly the result of an unusually high contribution from net exports in the quarter. Investment spending continues to fall and household consumption spending was at best, on par with previous results and not really trending either way. The less-worse National income figures were due to Terms of Trade that didn’t decline as much in the Sept quarter.

Indicators of domestic activity show that the economy is continuing to languish. One measure of domestic activity known as Gross National Expenditure or GNE (which is just adding up the contribution of all consumption spending, investment spending and inventories), shows that growth was negative in the latest quarter:-

Source: ABS

There are several important points about the September quarter results.

Net exports made an unusually high quarterly contribution to GDP growth

…and the question is whether this latest quarter of net export contribution can be sustained. The analysis below is based on chain volume measures ie removing price effects. The situation would look different if you looked at nominal results.

The size of net exports in the Sept quarter was unusually large and was the combination of two factors 1) larger-than-normal growth in exports and 2) a corresponding contraction in imports.

To provide some historical context – the contribution of net exports to real GDP growth in the Sept 2015 qtr (last orange bar) was the fourth largest quarterly contribution since the start of this data series:-

Source: ABS

The chart above suggests that these ‘blowout’ quarters are infrequent, but not impossible, events. Net exports have been making a larger contribution to GDP growth since 2010.

Exports – Of the $4b growth in exports for the quarter, $3.9b of that was due to growth in goods exports. The biggest contributors to growth in goods exports for the quarter were non-monetary gold ($2.36b), metal ores ($1.24b) and then coal ($0.9b), in real terms. So actually, the largest contributor to our export growth for the quarter had nothing to do with mining. The size of the Sept quarter export growth for non-monetary gold was unusually large. But all it represented was a return to a fairly normal level of exports – it was actually the previous quarter fall that looks like the anomaly.

While there has been a slow-down in growth of our largest export, metal ores & minerals, volumes are still at all-time highs. The current level of contribution to growth is actually above just above average. At the time of writing, iron ore spot prices have now fallen below US$40/mt. The ongoing fall in prices is likely to result in a shake-out among higher cost producers, but the impact on our export volumes will be dependent on how low prices fall and how much Chinese economic growth slows (our largest export market). By all accounts, growth in China is expected to slow in 2016 and this will likely have adverse effects on our exports.

Despite the higher growth in the latest quarter, annual growth in coal exports have been negative over the last two quarters.

A significantly smaller amount of our export growth, $140m, was attributed to growth in services exports in real terms (source: ABS 5302.06). Growth in service exports have slowed in the last two quarters. There is no doubt that the growth in services exports has benefitted from the falling AUD, but the size of the sector for the moment is still small – approx. 20% of overall exports (in real terms). There is still much work required to further develop our service export industries and the Productivity Commission released a draft paper in August 2015 “Barriers to Growth in Services Exports” outlining the barriers and potential remedies.

It’s likely that we will continue to see higher than average contribution from exports (in real terms) to GDP growth in the near term, maybe just not to the same degree as this quarter.

Imports – Imports contracted by over $2b in real terms for the quarter. This is now not an unusual event, but the recent trend is somewhat unprecedented in the history of the data.

Goods imports peaked in June 2012 and are now 2% below that peak. Service imports peaked later in June 2013 – and are now 16% below that peak.

Source: ABS

Most of the decline in services imports can likely be attributed to the falling AUD. Since Sept 2013, price deflators (price index) for service imports increased by over 24% versus the Sept qtr 2015. The average quarterly change in the import price index during this time was +8%.

Not all of the decline in the import of goods can be attributed to the effect of the fall in currency. The import price deflator for goods also increased, but to a lesser degree averaging 2.3% since June 2012 (which is roughly around CPI levels). The areas that have contributed to the slowing in the import of goods is the area of capital goods. Since mid-2012, the import of capital goods has contracted by over 26%. This is mostly the result of the decline in mining investment spending, but is not limited to mining.

In the latest quarter, the largest part of this contraction was lower imports of Intermediate and Other Merchandise Goods for groups such as processed industrial supplies, iron & steel, lubricants and other parts for capital goods. While this could be just a quarterly aberration, there is an important point to this. What sits in these groups are inputs for industries such as car manufacturing. As this industry in particular starts to wind down in Australia, lower imports here could start to become the norm (but will be replaced by imports of finished product).

Demand for imported consumption goods continues to grow – food & beverage, household electrical, non-industrial transport (cars), textiles, clothing, footwear, and toys, books and leisure goods all grew in the latest quarter. Annual growth of imports of consumption goods is over 10%.

It may not be so unusual now to see further declines in imports and this will add to net exports.

Taking a step back though, the theory is that net exports are supposed to take over from where the mining investment boom left off. But it’s not likely that the spoils of an export boom are shared throughout the economy in the same way as an investment boom. Think wages, prices, employment, investment – all of these have been falling as we’ve moved into the more volume, cost and efficiency focused phase of the mining boom. The export boom still supports some level of local employment, government revenue and mostly corporate profits. But this is highly dependent on commodity prices. The Sept quarter was essentially a breather from the more aggressive falls in our major commodity prices – iron ore, coal (bulk commodity prices) and oil. The falls have now continued on in earnest – this will be reflected in the Dec data.

The decline in mining capex spending isn’t being offset by other investment spending

There has been a narrative that the housing construction boom can and will fill the gap left by mining investment.

As of the latest quarter, private dwelling investment spending contributed +0.5% pts to annual real GDP growth, whereas total private business investment detracted -1.5%pts from annual real GDP growth.

Source: ABS

Housing construction has at least taken up some of the slack left by lower mining investment, especially for employment.

According to GDP figures, we are well and truly into the housing construction ‘boom’. Currently, dwelling investment spending, including alterations and additions, is growing at over 10%:-

Source: ABS

In historical terms, this level of growth is just above average, but it has been accelerating since 2012.

There are many factors that weigh against the ongoing growth in the housing construction boom. Household debt (mortgages) is already at all-time highs, banks are tightening lending standards, negative wage growth, likely lower demand from foreign investors, slowing population growth and interest rates that have little room to power further growth. On the plus side, with prices starting to cool in some parts of the country, it could start to encourage those who have been priced out of the market (FHB’s).

There is no evidence to suggest that the growth generated by dwelling investment spending is or will be remotely close enough to filling the gap left by lower mining investment. It’s likely that we will continue to see further declines in overall investment spending. The latest capex survey highlighted that these declines were not limited to mining either. Manufacturing and services were also expected to see lower capex in the coming year. In fact the survey highlighted that some of the bigger falls in spending were to be expected from 2016, although the capex survey does tend to overstate the extent of capex changes.

Public sector activity lags

The falls in investment spending are not limited to the private sector, with public investment spending also detracting from GDP growth. The worrying element is the rhetoric of the new Treasurer who believes that we have a spending problem, not a revenue problem. It’s fully expected that the December MYEFO will highlight a further deterioration in the budget deficit and this will only add further pressure to the level of public spending.

Household consumption spending growth is trending along, but not accelerating

Household consumption spending is still the largest part of our GDP. Growth in household consumption spending has been fairly stable over the last year, but still well below the growth levels pre-GFC:-

Source: ABS

For the moment, household expenditure is neither accelerating nor decelerating. On an annual basis, the falls in investment spending (public & private gross fixed capital formation) were only just offset by growth in consumption spending – with GNE growing by 0.24%. But in the latest quarter, the growth in consumption spending, both public and private, is more than offset by the declines in investment spending resulting in GNE declining by 0.6% on a quarterly basis.

At least the slight improvement in Compensation of Employees in the last few quarters, and mortgage/house price growth, will continue to help underpin spending.

National income improved in the latest quarter

The analysis so far has focused on the economy in ‘real terms’ – removing the effect of price changes to understand the actual level of activity. But an important consideration is how much income we as a country generate from our productive activity. One of the more important determinants of our National income at the moment is movement in our terms of trade (ToT). As mentioned, the Sept quarter was a breather from the accelerating falls:-

Source: ABS

This is a slightly different view of movement in the ToT because I wanted to highlight that while the ToT still declined in the latest quarter, the level of that decline was smaller than in the June quarter. This was the result of more stable commodity prices during the September quarter.

Growth in the individual components of National income improved in the latest quarter, ‘saved’ partly by less-worse Terms of Trade falls and better labour market data. We still seem a long way from the income levels pre the ToT peak (2011):-

Source: ABS

Part of this recent improvement is not going to last, especially the improvement (or the less negative contribution) in the gross operating surplus of private non-financial corporations, given the ToT declines have continued to accelerate in the December quarter.

An interesting point is that Gross Mixed Income (GMI) is making a larger contribution to overall to income/nominal GDP growth and has been trending this way all year. “GMI” represents unincorporated enterprises. Could this be the result of a growing group of self-employed people?

What isn’t adding up is the labour market. The relationship between Gross National Expenditure and hours worked has a reasonable level of correlation over its history (r=0.65). In the last few quarters, growth of the two measures have diverged – hours worked continues to grow and GNE is slowing (in the quarterly data GNE is actually declining):-

Source: ABS

For the moment, labour market indicators show that the labour market is actually quite stable. Hopefully this means that GNE will follow hours worked.

As always, GDP is backward looking. As of early December, we are looking at renewed falls across commodity prices, continuing poor data out of China, a worsening budget situation and a housing market (Mel & Syd) that looks like it is starting to cool.

Capital expenditure in Australia continues to fall – Sept 2015

Private capital expenditure in Australia continues to decline and there is little sign of a turnaround in the coming year.

We always knew that capex would be impacted as the commodity boom started to shift into the more operational phase of the commodity cycle. The recently released National accounts show a continued decline in real capital expenditure (Private Gross Fixed Capital Formation) of -4%, subtracting -0.9% pts from the latest annual GDP growth. Most of that decline was driven by a fall in “engineering construction” as a result of this transition in the phase of the mining boom.

What was hoped for by the RBA was that a ‘rebalancing of growth’ could be engineered by lowering interest rates to stimulate non-mining investment and by weakening the AUD. We now have lower rates and the AUD has depreciated to levels that should improve our export competitiveness. Rather than see a continued pick-up in non-mining investment activity, the latest business capex expectations showed that capex intentions outside of Mining for the next financial year are also likely to fall. The quarterly Survey of Private Capital Expenditure (capex) showed that while mining capex is expected to fall by -37%, non-mining capex is also expected to fall by -5%. Overall, capex is expected to decline by 23% in 2015/16. At a total level, this is a fairly significant decline.

The issue in Australia is that the lack of investment growth to help take up the slack now left by lower mining investment highlights a lack of confidence in future growth. This quote from Glenn Stevens (RBA Governor) is as relevant today as it was a year ago:-

“…any plans for growth that might be in the top drawer remain hostage to uncertainty about the future pace of demand”

• Glenn Stevens Governor RBA, testimony to the Standing Committee on Economics, 20^th Aug, 2014

And now, a year later:-

“The missing ingredient continues to be a lift in non-mining business investment, where we are still waiting for convincing signs of a pick-up”

• Philip Lowe, Deputy Governor RBA, Speech to the Committee for Economic Development of Australia (CEDA) 9^th Sept, 2015

Just how bad is the situation with capex?

So far, we’ve had eight (8) consecutive quarters where total private capex has declined (annual % chg based on latest qtr versus the same qtr previous year).

Annual capex growth has gone from a high of +17% in 2011 to a -4% annual decline in the latest June 2015 data.

Source: ABS

From a long term perspective, declines in capex have been infrequent and part of a broader economic slow-down. The capex decline so far is low compared to historical standards, but expected capex for 2015/16 could be more in line with previous steeper declines.

The split between mining and non-mining capex is interesting.

Source: ABS

Whilst the value of mining capex has fallen sharply since 2013, it looks like non-mining capex has started to pick up at the same time – helped in part by lower interest rates and the falling dollar. That said, growth in non-mining capex has been, on average, lower since the end of the mining investment boom, growing at +3.3% on average (between Mar 2013 and June 15) than during the main investment boom years (2000-2012) when non-mining capex grew at +4.2% on average. More recently, while there was some acceleration in non-mining capex growth throughout 2014, that momentum has stalled during 2015.

What has contributed to the decline in private investment?

According to the latest GDP data, the single largest contributor to the decline in private capex is in non-dwelling construction. This is the single largest area of private capex spending, accounting for 35% in the latest quarter. Within non-dwelling construction, it has been engineering construction that has declined significantly – this is the type of large scale construction supporting the development of major mining projects. The contribution of non-dwelling construction to annual private capex growth has declined further in the latest quarter:-

Source: ABS

The only area that has made a more significant, and positive, contribution to private capex growth is Dwellings – which covers construction of new dwellings and additions/alterations to existing dwellings. But the contribution of dwelling construction to overall private capex growth has also slowed between the last two quarters. Again, not a great sign, given we’ve got record levels of lending for housing and very low interest rates. Construction of new dwellings accounted for 25% of private capex spending in the latest quarter.

The one piece of good news was in machinery and equipment expenditure. This is also one of the bigger areas of private capex, accounting for approx. 20% of private capex and was one of the few areas where contribution to overall capex growth improved.

So what does the future hold?

The June 2015 Capex Survey indicates more declines to come in 2015/16

As I’ve pointed out in previous posts, the Capex Survey is not a comprehensive representation of all new capital expenditure intentions in Australia. The dollar value of the capex intentions and actuals, represent just over 40% of the above more comprehensive investment element in GDP (Private Gross Fixed Capital Formation data used above). It still useful in providing some indication about the general direction of intended capex spending across a range of industries. Industries not included in the survey include agriculture, forestry and fishing, education, health and community services and capex on dwellings by households.

This latest survey for June 2015 covered actual capex for the full year 2014/15, as well as the latest forecast capex for the year 2015/16 called estimate 3. Estimate 3 contains a forward view of the next four quarters of capex – at this stage, the data for all next four quarters are estimates (no actuals yet).

For the full year 2014/15, actual capex included in the survey declined by 4.7%, or -$7.3b. Note that this is larger than the -2.6% in latest GDP data, when calculated in the same way.

Unfortunately, the latest forecast for capex in 2015/16 holds little hope that this will improve:-

Source: ABS, est 3 2015/16 not adjusted using realisation ratio

Estimate 3 for expected capex in 2015/16 signals a possible fall of -23% in spending, or a decline of -$39b. The chart above also highlights the concerning trend of this leading element.

It’s fair to say that these expectations have tended to ‘overshoot’ the final ‘actual’ to both the upside and the downside. So at worst case, actual capex will follow that lead, but is not likely to fall further than that.

The other concerning point from the capex survey is the composition of industries forecasting a decline in spending in the following year:-

Source: ABS, note realisation ratios used mining = 0.89, manufacturing = 1.07, other selected industries = 1.18, total = 1.0

The fall in mining capex has been expected for a quite a while. That said, the expected decline in 2015/16 is fairly large at -37% or -$28b.

The continued decline in capex for manufacturing is an ongoing issue. The high AUD hurt Australian manufacturers during the mining boom and the wind back of industry protection policies over the last several decades has seen the manufacturing sector shrink in size. No doubt globalization has also had an impact on the broader sector as much manufacturing has been outsourced to lower cost countries. The Australian dollar has now depreciated by close to 30% and capex still looks to remain depressed in the short-term. It won’t help that car manufacturing will also cease in Australia by 2017.

A lower AUD is no magic bullet as it will take time to rebuild export businesses and relationships. Manufacturers, and more immediately, service providers, in Australia that compete with imports may see a more immediate effect as the falling AUD filters through the supply chain. But only once there is consistent stronger growth, will capex businesses cases start to look more viable. The one downside to a weaker AUD is that import of capital equipment will become more expensive.

The one bright spot in the survey had been capex for “other selected industries”, which grew by +12% in 2014/15. Expected capex for ‘other selected industries’ is now forecast to decline by 5.3% in 2015/16. The ‘other selected industries’ accounts for a significant proportion of the value of capex in the survey and comprises key services industries. Growth in capex for this group had been stronger, relative to mining and manufacturing, over the last several years.

What does this mean for the Australian economy?

Usually, falling levels of capex are not a good sign for the economy. The fall in investment means that we will likely continue to see lower levels of growth in the economy. This could adversely impact employment, income and output growth.

One possibility is that the fall in mining investment will just be replaced by the increase in commodity exports as major mining projects start to come online. That has been a leading theory of the mining boom, but that’s not what has been happening recently. Part of the issue is that whilst export volumes have been rising, commodity prices have been falling. In nominal terms, net exports have detracted from GDP growth (on an annual basis) over the last five (5) consecutive quarters:-

Source: ABS

The other issue is that if global growth is slowing, then it’s more likely that demand (i.e. volume) for commodities will also fall because they are usually inputs into the production process.

Could housing construction fill the gap? There are still a few important headwinds. APRA is in the process of curbing investment loan growth, rightly recognising that the high proportion of mortgages on bank’s balance sheets represents a ‘concentration risk’ to the financial system. The residential dwelling construction component, whilst growing fast, is still not big enough to fill the potential gap left by mining. Putting aside any question of whether housing construction should fill the capex gap, growth in dwelling construction would need to accelerate from currently 23% to roughly over 40% (assuming that mining investment halves from here and all other components continue to grow at the current rate). With housing lending and household debt already at record highs, interest rates already very low and real wages and income stagnant at best, Australia would probably need to see greater levels of foreign investment in new dwelling projects for this to happen.

Could public infrastructure spending help fill the gap? This might not fill the entire gap, but at least well targeted investment on infrastructure projects would actually be good for the productive capacity of the economy in the future. The government has access to some very low interest rates, but it seems to lack any sense of urgency or leadership to get something done on both the infrastructure and reform fronts.

“A low exchange rate, low growth in wages and low interest rates are not the basis for sustained increases in investment and output. They can certainly help during the adjustment phase, but ultimately we will be better off if increased investment is driven by high expected returns rather than by the low cost of finance or low wages. This is why the focus on improving the climate for business investment is so important. There is no magic bullet here, but surely the investment climate would be improved through a strong focus by both business and government on innovation, productivity, human capital and entrepreneurship, topics that I have spoken about on previous occasions.”

• Deputy Governor of the Reserve Bank of Australia, Philip Lowe, Speech to the Committee for Economic Development of Australia (CEDA) 9^th Sept 2015
  

Fundamentally, the missing ingredient is growth. This is why private capital investment growth is an important indicator. In a most simplistic way, it’s a sign that business is expecting growth – growth in sales, consumption and/or profits. Investment might take the form of new equipment to expand production or the introduction of a new technology/innovation to improve productivity. Either way, it’s about expanding the productive capacity at a firm-level in order to take advantage of growth opportunities – this is the cornerstone of economic, employment and productivity growth.

Meanwhile, in Australia…

“…firms are more focused on paying dividends than on investing in the future of their businesses or the country. At 91 per cent, the proportion of ASX-listed companies paying a dividend is now the highest on record, up from 83 per cent five years ago. Most of them increased the dividend in the latest year despite flat or falling profits”, Business Spectator, Too much Talk, Not Enough Action, 1^st Sept 2015

More woe to come for our Terms of Trade

There have been two recent indications that we could see some weakness in our external sector when September 2014 GDP is released in a few weeks. Firstly, a continued unfavourable mix of import and export price changes in the Sept quarter point to further declines in our Terms of Trade (ToT). This provides an important indication of continued slower National income growth in the Sept quarter. Secondly, net exports look like it will only make a small positive contribution to overall GDP growth in the Sept quarter according to the latest monthly trade data. Growth in Australian National income and output during the 2000’s has been due, in no small part, to the ToT and the resources investment boom. But as the commodity cycle transitions from the investment to the production and export phase, National income growth has slowed and the degree to which export growth will outweigh the decline in project investment is now unclear. The transition is so far looking bumpy due to falls in commodity prices and what appears to be slower growth in China right at the time that production and export supply from these major resource projects starts to come online.

Import and Export Price Indexes

The release of import and export price data for Sept indicates further declines in the ToT when the National Accounts data for the September quarter is released in early December. The Import and Export Price Index (IPI and EPI) does not use the same methodology to measure import and export prices as the ToT index, but the EPI and IPI provides a fairly good indicator of what the National Accounts will show for the ToT in December. Directionally, the two have moved in sync.

The main highlight is that Export Price Index (EPI) for the Sept quarter continued to fall faster than the Import Price Index (IPI), albeit at a slower rate than the quarter prior:

• Export prices declined by -3.5% for the Sept qtr, but were down -7.9% in the previous June qtr – therefore Sept was not quite as severe
  

From an annual perspective, export prices have now declined in three out of the last four quarters, hence the large increase in the annual rate of change:-

• Export prices have declined by -9.5% for the year to the end of the Sept qtr. The annual change was -1.9% at the previous June qtr 2014
  

   

The EPI peaked back in Dec 2008 and the index is now 24% below that peak. In the last 3 years, the EPI is down -18.3%.

Source: ABS

Export price indexes by major export have declined in most cases, with the exception of Gas.

New index weights were applied in Sept 2014 based on export size. Our top five exports represent 64% of total goods exports as at Sept 2014 – Metalliferous Ores 33.24%, Coal, Coke & briquettes 14.38%, Gas, Natural & Manufactured 7.05%, Gold non-monetary (ex gold ores & concentrates) 5.37% and Petroleum, petroleum products and related materials 4.5%.

Export prices in four out of the top five exports declined in the quarter, adding further to annual (and longer term) price declines.

Source: ABS

The exception for the moment is Gas. Export prices for LNG continue to rise, likely still a function of a reasonably tight global market. The development of LNG projects are at a slightly different stage than Iron Ore.

Source: ABS

Investment in new LNG capacity has been part of the growth in resources investment and there are at least six (6) major Australian projects (as well as US, Indonesian and Malaysian projects) due to come online from 2015, adding further volume to total Australian exports and likely adding downward pressure to prices at the same time. It’s unclear the degree to which growth in LNG exports will off-set the decline in project investment spending – an important consideration when thinking about the impact on local aggregate demand.

Some relevant points from the BREE Sept 2014 update:-

“Over the medium term, Australian gas production will more than double. This growth will be underpinned by Australian LNG production which, in concert with rising Chinese gas consumption, will result in a much larger global LNG market by 2019. Supply growth and lower oil prices will also place downward pressure on LNG prices.”

“The growth in Australia’s exports over the period to 2019, underpinned by 61.8 million tonnes a year of new capacity, greatly alters the Asia-Pacific LNG market and is expected to make Australia the world’s largest LNG exporter by 2019.”

“A growing US LNG export sector would increase liquidity in what is currently a very tight global market. This would in turn depress spot prices and place longer term pressure on contract pricing and the mechanisms under which contracts are negotiated.”

Monthly Balance of Trade – September (seasonally adjusted)

Trade data released for September points to only a small positive contribution to nominal GDP growth from net exports in the September quarter.

Source: ABS

Net exports in the June quarter GDP (current prices) was -$4,691m, a large negative turnaround from the +$2,566 net exports figure of the March 2014 qtr. Based on the monthly trade data (which is revised each month as more data becomes available), the current estimate for the Sept quarter is approx. +0.04% pt contribution to GDP growth for the quarter (using the net exports data at current prices from the National Accounts 5206.03 until June 2014). The annual contribution will not be favourable at this current rate either. As mentioned, the trade data is provided monthly and tends to be revised the following month, so should be considered as an estimate until GDP is released.

What made the current quarterly change slightly positive was the fact that, despite lower exports of goods & services of -$621m, imports also slowed in the quarter and are so far estimated to be $984m lower than in the previous quarter. Had imports increased/grown versus the June qtr, then the trade balance would have been worse (and likely detracted from GDP growth) given the quarter on quarter decline in nominal exports.

The contributor to the decline in exports was within the ‘Goods/Merchandise’ category. But in order to drill down into the detail, you need to look at data that is not directly comparable – Merchandise Exports by SITC classification using original data, not seasonally adjusted data. The ‘original’ data paints a much more positive view of the status of our goods exports. Using the original data, goods exports grew by 1.68%, rather than the decline of -1.1% that the seasonally adjusted data indicates.

Using the more positive data still highlights that our single biggest export group, Metalliferous ores (28), likely only made a small contribution to overall nominal export growth for the quarter. This is somewhat concerning given that projects are starting to come online and haven’t cycled a full year yet.

Source: ABS 5368.12a

From BREE:

“Iron ore volumes are forecast to increase by 13 per cent in 2014-15, underpinned by a full year of production by recently started mines. However, earnings from iron ore are forecast to decline by 4 per cent because of forecast lower prices.” Source: BREE Sept 2014 Update

On a more positive note, the month on month trend may be highlighting a turnaround in iron ore exports, with the last three months showing improvement in the trend at least.

Source: ABS

With further falls in the ToT likely, National income growth will remain low. The monthly trade data suggests that net exports, despite major mining export projects coming online, may not provide the impetus for higher nominal GDP growth in the quarter. We’ll now have to wait and see what the National Accounts look like in early December.

 

 

 

 

 

 

 

 

Consumer prices and the Australian economy – September 2014

Not long ago, I wrote a post arguing why I thought GDP growth was too low. I outlined several reasons in support of this argument: 1) that the pool of unemployed persons has been growing for a duration similar to that of the early 90’s recession and 2) real income per capita was no longer growing. The recent release of Q3 2014 CPI data provides some further evidence supporting this argument. Where aggregate demand is growing faster than its potential rate, demand for resources generally places upward pressure on prices and unemployment declines. The release of Q3 CPI shows that consumer price growth in Australia has started to slow, with growth of core inflation now in the middle of the RBA range of between 2 and 3%. Over the last few quarters, annual CPI growth was at the upper end of the RBA band which seemed at odds with the idea that growth in Australia was too low. There were in fact suggestions that the RBA would need to hike rates. But quarterly CPI growth and other price measures such as wages, commodity prices and Terms of Trade (ToT) have been pointing to an easing in the level of price growth across the economy. Whilst a rate of core CPI right in the middle of the RBA range doesn’t sound like a problem, it’s in combination with indicators such as unemployment growth and income stagnation that point to this as another symptom of a bigger/broader issue.

This situation is not limited to Australia. Globally, price pressures have been easing, with growing concerns of emerging deflation throughout Europe, US, UK and China according to data recently published by The Economist (25^th Oct 2014). It’s difficult to pinpoint just one reason for this phenomenon, but slowing global growth is a good starting point. For Australia, the reversal of the ToT boom has been a fairly significant factor associated with slower income growth, growing unemployment and now slowing price growth.

Highlights of CPI Quarter 3 2014

The Sept quarter CPI growth was 0.5%, the same rate of growth in the previous quarter. Quarterly growth at 0.5% is just below the average for Sept CPI growth over the last 10 years of +0.8%.

The quarterly growth trend has been slowing throughout the last four quarters:-

Source: ABS

The annual rate of growth slowed significantly in the Sept quarter from 3% to 2.2% (seasonally adjusted). This large slow-down in annual growth is partly the result of the shift to a higher base used to calculate growth – Sept 2013 quarterly growth was relatively strong at +1.2% (see chart above). That said, the quarterly growth since Sept 13 has been slowing, resulting in annual CPI growth closer to 2% – at the lower end of the RBA range – and reaching this point in a relatively short period of time.

The measures of core CPI growth provide a better guide as to the underlying price growth. Growth in measures of ‘core’ CPI, the trimmed mean and weighted median, eased somewhat in Sept and remain in the middle of the RBA range. The trimmed mean view of consumer prices is the main focus for RBA assessment.

Source: ABS

For the Sep 2014 qtr;

• Trimmed mean (15% of the smallest & largest price movements are removed or ‘trimmed’) +0.4% quarter on quarter and +2.5% year on year (a slowing of the annual rate)
• Weighted median (price change at the 50% percentile by weight of the distribution of price changes) +0.6% quarter on quarter and +2.6% year on year (no change in the annual rate)

The biggest contributors to quarterly CPI growth was in Food and Housing categories:-

Source: ABS

The biggest price pressures under Housing were Purchase of New Dwellings and Property Rates and Charges. Both offset the large -0.14 % pts decline in Utilities (Electricity) that also fall under this category.

There was one single significant contribution to growth in Food CPI and that was in the Fruit category.

The big turnaround for the quarter was the slow-down in Health costs, from +0.17% pts last quarter to -0.1% pts this quarter.

Overall, CPI growth is slowing, but for the most part is sitting right in the middle of the RBA range. Based on this, it’s unlikely that there will be pressure to raise rates.

But there is a broader context to this CPI report…

Back in Sept 2012, Assistant RBA Governor, Christopher Kent, gave a speech to the Structural Change and the Rise of Asia Conference titled Implications for the Australian Economy of Strong Growth in Asia. This speech laid out the broad set of factors effecting the Australian economy, namely the impact of economic growth in Asia (China) on driving our Mining boom. The most visible impacts in Australia were the rise in the ToT, an appreciating exchange rate and the growth or “reallocation of productive factors” to resources and resources related industries.

It’s relevant to revisit some of the points of this speech as they relate to the impact on prices and growth now that the positive ‘shock’ to the ToT has started to reverse and the economy has commenced the transition from phase II (investment) to phase III (production and export) of the boom.

“The positive shock to the terms of trade, resulting from a rise in commodity prices, increases income accruing to the resource sector and increases that sector’s demand for productive inputs. Both of these exert a measure of inflationary pressure.” Christopher Kent, RBA Assistant Governor, 19^th Sept 2012

“Domestic inflationary pressures, associated with higher wages and incomes, will lead to higher inflation for non-tradable goods and services but, at the same time, the gradual pass through of the initial exchange rate appreciation will lead to lower inflation for tradable goods and services (whose prices in foreign currency terms depend to a significant extent on global considerations). In this way, the appreciation of the exchange rate helps to offset the inflationary impulse from the terms of trade shock, and assists in maintaining inflation in line with the inflation target.” Christopher Kent, RBA Assistant Governor, 19^th Sept 2012

We’ve seen all of this happen in the Australian economy.

Firstly, the rise in the ToT generated higher income growth.

Source: ABS

Once the ToT started to appreciate, real GDI started to grow much faster than real GDP – the difference being the impact of the ToT. The ToT peaked during Sept qtr 2011 and is now 21% below that peak. While the ToT did peak, it is still well above its historical levels for the moment – but income growth has stalled nonetheless. More on this later.

Secondly, the exchange rate did appreciate during the investment phase of the boom.

Source: RBA

The real AUD TWI appreciated during the years between 2000 and 2011, with the exception of 2008/9 (GFC). Growth in the exchange rate started to slow from June 2011 but importantly, remained elevated until it peaked in March 2013. Since then, the real AUD TWI has fallen by 7%.

Finally, there was greater inflationary pressure in the non-tradable sector than the tradable sector (see definitions and detail of each here) during the period of the investment phase of the Mining boom.

Source: ABS

It’s hard to look at this chart and ascertain a ‘neat’ relationship between exchange rate changes and annual tradable inflation. The range for tradable CPI growth has been between +4% and -2% during this time, but has generally been lower than non-tradable inflation growth. This can be shown more clearly by reproducing one of the charts from the RBA speech – the ratio of non-tradable CPI to tradable CPI.

This first chart is from the RBA speech as it provides the historical context. The second chart is updated using the latest data (with as much history as available from the ABS).

This first chart reinforces that since the start of the ToT boom, non-tradable inflation has grown much faster than tradable.

The updated data show a fairly important change in that trend – non-tradable CPI growth started to slow from March 2013:-

Source: ABS, The Macroeconomic Project

This is an unusually long period of no change in this ratio, given the growth in non-tradable CPI during recent history. Prices are still growing, but at a slower rate and this is could be an important indicator of slower demand in the domestic economy.

Since June 2013, non-tradable CPI has started to contribute less to total CPI growth. In Sept 2014, non-tradable CPI made its lowest contribution to total CPI growth (contribution data is only available back to June 2012). Since June 2012, tradable CPI also started to have an increasingly positive contribution to CPI growth, but it too made a smaller contribution to CPI growth in the recent quarter. Both tradable and non-tradable CPI slowed in the latest quarter:-

Source: ABS

There are 47 categories classified as ‘tradable’ – which contributed +0.76% pts to CPI growth. In over half of those categories (26), prices are either flat or declining (YoY -0.39% pts), 17 categories contributed +0.31% pts and the top 4 categories contributed the bulk of the price growth +0.86% pts. The categories were Tobacco, Fruit, Vegetables and International Holiday & Travel. The increase in Tobacco prices is due to an excise increase.

By contrast, there are 40 categories classified as non-tradable, which contributed 1.58% pts to overall CPI growth. In only 12 out of 40 categories are prices flat or declining, contributing -0.26% pts to overall growth. The bulk of the growth in non-tradable CPI comes from the ‘middle’ 24 categories which contributed +0.94% pts. The top 4 non-tradable categories still punched above their weight adding +0.87% pts. The top 4 categories are (in order) Purchase of New Dwellings, Medical & Hospital Services, Rents and Other Services in respect of Motor Vehicles.

There is broader pressure i.e. more categories contributing to CPI growth, in the non-tradable sector and our housing market (new dwellings anyway) is driving one of the biggest parts of that growth.

This brings us to the present day – and we are now seeing the opposite effects take place as the ToT boom reverses.

As mentioned earlier, the ToT has declined by 21% from its peak and the most important thing about this in relation to the CPI is the impact on income growth. The most accurate representation of the income effect is to look at Real Net National Disposable Income (NNDI) per capita. During the ToT boom (2000-2011), growth averaged 2.9% (not including the GFC). Since the ToT peaked in Sept 2011, income growth has averaged 0%.

Source: ABS

In per capita dollar terms, real NNDI has declined by -2.6% since its peak in Sept 2011 (ToT peaked at the same time). This isn’t a huge drop (the chart above measures growth not the per capita value) and the decline is not a short and deep correction that you would see associated with a recession, but rather, income growth has stagnated (at best) over a somewhat extended period of time. Unfortunately, further declines in commodity prices are expected and this is likely to maintain pressure on income growth. If National income growth remains low, it’s likely that CPI growth, especially non-tradable CPI, will continue to slow.

Unfortunately, the exchange rate stayed high during the initial falls in commodity prices and the ToT (the ToT started falling from Sept 2011 and the real AUD TWI only started to decline from March 2013). Elsewhere in the economy, it’s likely that the final stages of the Mining investment phase, a continued housing boom (which requires some funding from overseas markets to maintain loan growth) and relatively higher interest rates in Australia since the GFC have kept the exchange rate higher than expected. This has placed some local non-resources industries and the resources sector (due to falling commodity prices and the scramble to cut costs) at a disadvantage. So far the real AUD TWI has only fallen by 7% and the AUD/USD has fallen by 20% but remains above the level that the RBA deems as its ‘magic spot’ of between US$0.80 and US$0.85 (SMH, “IMF: Australian dollar should trade at ‘low US80¢'” 25-27 Jan 2014).

This is not a recessionary period and total output has not declined, but activity/growth has slowed. For the moment, income growth per capita has stopped, unemployment continues to rise and price pressures are starting to ease in the domestic economy as our ToT boom reverses and global growth remains low. This situation is likely to continue, if not become worse, as further falls in our ToT are expected. From a policy perspective, it’s unlikely, given this environment, that the RBA will increase interest rates in the short-term. Depending on the size/severity of changes in the ToT, it would be more likely that the next move in the official cash rate will be down.

The huge elephant in the room remains the ongoing strength of the Australian housing market.

 

 

Growth in New Credit Continues to Accelerate in June 2014

Growth in new private sector credit has been accelerating for a year now. The largest component, housing, has gained most of the attention. But the more hidden star of the show has been the acceleration in growth of new credit for business. It’s an important point to focus on because it should be positive news regarding the Australian economy. Credit growth for business should lead to increased capital investment and all the benefits that come along with that – income, employment and economic growth. Yet private sector capex growth has not been a strong performer over the last few quarters, mostly due to the slowdown in growth of mining capex. The main question of this post, is whether this acceleration in the growth in new credit for business has, or will, likely end up driving growth in business investment – especially non-mining investment. Given the forward estimates for total capex (ex housing) in the 2014/15 financial year are still well below current levels, the answer is probably not to the degree needed at this stage.

The other important highlight in the June data is the reversal in the size of new credit growth between investor and owner occupier mortgages. The change was surprisingly large and, if it continues, highlights a potential shift in sentiment in the housing market. The overall continued acceleration of growth in new mortgage credit is likely to feed into ongoing house price growth.

Some clarification is required first. On this blog, I maintain a ‘credit impulse’ page which looks at the growth in new credit as a % of GDP. Growth in credit/debt is one of the major themes driving the Australian economy, along with mining and housing, so the tracking of the credit impulse is a useful indicator of activity in the economy. The data for this post and the credit impulse calculations are sourced from the same data – the stock of outstanding credit (RBA D02). As GDP is released quarterly, the credit impulse tracker is only updated at that time. In between these times, the ‘growth in new credit’ is used to gauge activity in the economy. The growth in new credit looks at second order changes or acceleration in credit growth in dollar terms. Read more here.

There are two significant highlights in the release of the June data by the RBA.

The first is the continued acceleration of growth in new credit for the business component of total private sector credit.

Chart 1

Source: RBA

The growth in new credit for business is now, for the first time in well over 18 months, one of the larger contributors to the overall growth in new private sector credit.

The growth in new credit for business could be an early indication that business is now willing to take on new debt to invest and/or expand. This is generally good news for economic growth. But it’s important to consider what this growth in new credit is being used for and which sectors are driving the growth in new credit in order to ascertain its potential impact on the economy.

As an aside, I generally place greater value on growth in business debt leading to productive capital investment than growth in debt for housing. Growth in new credit for housing does not tend to have the same impact on the economy where the majority of that credit growth is used to just transfer existing assets within the private sector for higher and higher prices. This type of credit growth potentially takes away from more productive forms of investment usually undertaken by business.

The stock of total outstanding credit for business is now only 2% below the peak reached pre-GFC in November 2008. The growth over the last 12 months (especially) is evident, as is the large increase in June 2014.

Chart 2

Source: RBA

The important assumption above is that this credit growth will lead to some form of productive business investment and/or expansion. This is usually part of the transmission mechanism that central banks rely upon when implementing a lower interest rate policy. But, despite the acceleration in growth in new credit for business over the last year, private capital expenditure growth has been poor of late.

Looking at the Mar ’14 GDP results, Private Gross Fixed Capital Formation (GFCF) made a -0.09% pt contribution to annual GDP growth of +3.53%. Breaking Private GFCF down into its component parts reveals the split between a negative contribution from Total Business Investment and a positive contribution from Dwellings & Ownership Transfer costs. This is consistent with the larger contribution from mortgage credit growth than business credit growth in the year leading up to the March quarter.

Chart 3

Source: ABS

The dwellings component is made up of ‘new & used dwellings’ most of which is new dwelling construction but also includes new additions and/or alterations to existing private dwellings. ‘Ownership transfer’ costs relate to all ownership transfer costs, not just for dwellings.

The main drivers of the negative contribution for Total Business Investment was non-dwelling construction and machinery & equipment, together contributing -0.67%pts to the decline in the Total Business Investment component. The Total Business Investment component has made a negative contribution to overall GDP growth for the last three (3) quarters and at a similar rate.

So will this current acceleration in the growth in new credit for business likely feed into growth in business investment? First consider which sectors have been driving this growth in new credit for business.

The RBA series – Bank Lending to Business – Total Credit Outstanding by Size & Sector (D7.3) provides some insight as to which sectors have been driving this growth in new credit for business over the last year. Note that the most recent data is only up until March 2014.

Over the last year, the single largest contributor to the growth in new credit for business was from the Finance & Insurance sector.

Chart 4

Source: RBA

Looking at the trend in the growth of new credit for business by major sector provides a further layer of insight. I’ve split the major sectors into two charts given the relative size of the dollar growth in new credit:-

A) The two largest sectors by share of total credit outstanding are Other (48%) and the Finance & Insurance sector (16%).

Chart 5

Source: RBA

The annual growth in new credit for Finance & Insurance has accelerated to $16b as of Mar 2014 – with the trend over the last 3 quarters to Mar ’14 clearly positive. Despite being the larger share of total bank lending to business outstanding, the growth in new credit for ‘Other’ remains negative and the upward trend no longer in place. Both are well below their recent highs which will likely have implications for the relative impact in the economy.

The question that this raises though, is to what degree will bank lending to the Finance & Insurance sector will lead to growth in capital investment? Finance and Insurance are service based industries, so large capital projects for these firms are likely to be IT or real estate based. According to the latest ABS capex survey (in current dollars), actual annual capex expenditure in the Finance & Insurance sector declined by 6.3% and the sector only accounts for a small proportion of the value of capex in the survey. More likely, this growth in new credit could find its way into the economy through these firms carrying out their core business of providing funding. Whether this ends up funding further housing speculation or more productive business investment remains to be seen.

B) The other major sectors of Agriculture, Mining, Manufacturing, Construction and Wholesale, Retail and Transport account for 36% of total outstanding credit of bank lending to business.

The size of the growth in new credit among these sectors is clearly much smaller than Finance & Insurance (again will have implications for the level of impact in the economy), but the important point to note is the recent acceleration of growth in new credit across most sectors. The direction is important, but the relative size of the growth is still small (which is why the credit impulse is so useful, as it expresses this growth as a % of GDP).

Chart 6

Source: RBA

The important point from this is to see whether this growth in new credit starts to show up in capex in these sectors. Given the continued acceleration of growth in new credit for the business sector (highlighted in chart 1, RBA D.02) between March and June 2014, there may be some upside surprise in private GFCF in the next few quarters GDP.

Looking at the Expected Capex survey from the ABS for March 2014, the small improvements in expected capital expenditure for manufacturing and ‘other selected industries’ are overshadowed by the sheer scale of the slow-down in mining.

Chart 7 – Total Capital Expenditure – actual and expected

Source: ABS 5625 – this survey isn’t a comprehensive over view of capex across all industry sectors – the ‘other selected industries’ does not include agriculture, forestry and fishing, education, and health and community services industries and capital expenditure on dwellings by households.

Firstly, looking at the remainder of the 2013/14 year above. Note that estimate 6 comprises actuals to March and estimates for the June qtr of the 13/14 financial year.

Total capital expenditure at estimate 6 represented a -2.5% decline on the previous estimate 5 at Dec 2013. The largest component of that decline was mining $-7,294m. At the same time manufacturing capex increased by 6.2% or $558m and ‘other selected industries also grew by 4.4% or $2,461m – was this growth driven by the recent growth in new credit? But the growth in capex in both these sectors was clearly overshadowed by the slow-down in mining. The upshot is that significant capex increases (and presumably credit) would be required by industries ex-mining in order to ‘re-balance’ growth as mining capex slows.

Looking further out to 2014/15, estimate 2 for total capital expenditure is set to decline by 15% from where estimate 6 currently stands. The biggest contributor to that decline is mining at -16% or -$15,418m. There is no evidence here to suggest that other sectors will be picking up the slack. For example, capital expenditure in manufacturing at estimate 2 for 2014/15 year is 29% or -$2,788m below where estimate 6 currently sits for the 2013/14 financial year. Other selected industries is similar, sitting at -13% or -$7,581m for the 2014/15 financial year.

The next capex survey for the June 2014 qtr is due for release by the ABS on 28^th August 2014 (ABS 5625 Private New Capital Expenditure and Expected Expenditure) and this may shed some more light on whether this recent acceleration in credit growth between March and June has fed into incremental capital expenditure for the remainder of 2013/14 financial year.

Another more up to date indicator of potential capital expenditure is the import of capital goods (ABS 5368.08 – I’ve used trend data here in order to provide a guide on direction). The import of capital goods has declined by 5.5% year on year at June 2014 compared to an increase of 7.9% on the import of consumption goods. The month on month growth in import of capital goods suggests only a slight improvement via a slower rate of decline in the three months leading up to June 2014. In fact, the import of intermediate goods highlights that ‘other parts for capital goods’ has grown annually at over 6%, but the recent month on month data points to decline over the last five months.

The second highlight of the RBA June data was the dramatic shift in the size of the growth in new credit from investor to owner occupier mortgages.

Growth in new credit for housing investor mortgages has been the largest component of growth in total new private credit over the last year, despite the size of outstanding credit being half that for owner occupier activity. But in June, this trend reversed sharply, with growth in new credit for owner occupier mortgages increasing sharply;-

Chart 8

Source: RBA

Given that this has happened in one month, it’s unclear as to whether this is the start of a new trend. But if it is, it marks the start of a change in sentiment. Investor activity has been the key driver behind growth in housing debt and therefore house prices during this current interest rate easing cycle. It appears that owner occupiers were much slower to take advantage of lower interest rates to increase their debt load. Recently, several of the bigger banks have suggested that owner occupiers have used this opportunity to pay down mortgage debt at a faster rate. Full article here (source: SMH 27 July 2014). The data I use here is the stock of outstanding credit (the difference between monthly totals represents the addition of new debt to existing debt, less all debt that is paid down in the period), so a sudden increase in new credit growth could indicate that 1) owner occupier mortgages are now growing faster than households are paying down incremental mortgage debt or 2) that owner occupier households have slowed their faster rate of mortgage pay-down for some reason.

The growth in new credit for owner occupier mortgages only turned positive in May 2014, so the large increase in the June data is surprising. I will delve further into this issue in another post looking at the growth in housing finance and house prices in Australia.

It’s worthwhile pointing out that the growth in new credit for all mortgages is now higher than the pre GFC peak. This was not the case for growth in new business credit.

Chart 9

Source: RBA

Given the data shows the second order change, it means mortgage credit growth continues to accelerate in Australia. This ongoing acceleration suggests that house prices will, on aggregate, also continue to rise in the near term.

 

 

 

 

Real estate indicators from key mining towns

The real estate market in a few key mining towns is providing some insight as to how close we are to the end of the mining investment boom.

With a limited supply of housing and an ongoing influx of workers to these regional towns, asking rents and house prices literally soared during the investment phase of the boom. These trends have been reversing for the better part of 2013 and appear to be accelerating to the downside over the last 3-6 months. This is despite the current growth in National house prices.

I’ve only covered a small range of the major mining towns across three main mining states to get a broader overview of mining than just iron ore mining. Falling asking rents and house prices are evident across a range of mining industries & states. All of the data for this post comes courtesy of SQM Research (www.sqmresearch.com.au), unless otherwise stated. There are any number of postcodes you can investigate by going to the SQM site and searching the free statistics.

The mining investment boom has been a major source of income, investment and economic activity for Australia. Whilst mining hasn’t employed a large proportion of the workforce, incomes have been very high. The suburbs of northern Sydney and inner Melbourne used to record the highest concentrations of wealth and personal income. But according to the Census 2011, the top 13 regions for the highest median personal income were in WA. The towns with the highest median income are located in the Pilbara region (I’ve covered only 3 main towns here), with median incomes higher than $2,000 a week (source: ABS). Broadly speaking, as the investment phase of the boom fades, the focus will shift to efficiency and cost cutting to maximise profits from the export phase.

Western Australia

Karratha, WA – 6714

This is one of three major settlements in the Pilbara – along with Port Hedland and Newman. The Pilbara is known for its petroleum, natural gas and iron ore deposits.

For the most part, the residential vacancy rate in Karratha has been extremely low or zero. Since late 2011, the vacancy rate started to climb. In the last 3 months, the vacancy rate has gone from approx. 4% to 6.7% in November 2013. According to SQM Research, a vacancy rate of 3% is around “equilibrium”. The vacancy rate in Perth is 1.7%.

The previous tightness in the rental market is reflected in asking rents – reaching a peak of $2,000/week (houses). With a growing vacancy rate, asking rents across houses and units have declined by up to 50% from their respective peaks. The start of this decline in asking rents is consistent with the growing vacancy rate, starting all the way back in late 2011.

This weakness is not limited to the rental market. There has also been an increase in unsold stock on market. This appears to have impacted asking prices mostly since mid-2012, although prices have declined over the last 3 years as well. For the 12 months to November 2013, asking prices for houses and units have declined by 12% and 15% respectively, with 2 bedroom units down as much as 27%.

Port Hedland, WA – 6721

The situation in Port Hedland is similar, but most of the weakness looks to be showing up in the rental market.

The residential vacancy rate has shown quite a seasonal pattern over the last 2-3 years, regularly fluctuating between zero and 2%. The vacancy rate in Port Hedland has now reached 5.8%.

Asking rents are well off their peaks, with rents falling by 19% and 39% for houses and units respectively over the last 12 months.

Whilst stock on market has increased steadily since 2011, it does appear to have stabilized over the last several months.

Asking prices have also declined from their respective peaks and are down 15% and 10% for houses and units over the last year alone. But small pockets of strength remain. For example, the asking price of 3 bedroom houses has grown by 10% over the last year.

Newman, WA – 6753

The trend changes in Newman appear to be a more recent phenomenon. The residential vacancy rate has gone from a low of just above zero at the start of 2013 to a high of 5.8% in November 2013.

The fall in asking rents has only occurred since the middle of 2013. Asking rents are down 10% and 6% for houses and units respectively over the last 12 months. Asking rents are still relatively high compared to history, which suggests prices may still have a way to go down.

Housing stock on market for sale has seen a marked increase since the start of 2013. Most of the increase has been in the number of houses (as opposed to units) hitting the market. Interestingly, asking sale prices have moved only modestly during the shorter time period.

Queensland

Moranbah QLD, 4744

This is a coal mining town in QLD and in 2011 was ranked as the most expensive place to live in QLD.

It’s interesting that the growing vacancy rate is not just limited to WA. Over time, there has been a distinct and consistent seasonal pattern to the vacancy rate in Moranbah, fluctuating between zero and 3%. Since early 2012 though, the residential vacancy rate has gone from sub 1% to 7.7% at November 2013. The vacancy rate in Brisbane is 2.4%.

This large move has been matched by large declines in asking rents since mid-2012 as well. The declines over the 3 year period are also substantial – 46% for houses and -37% for units.

Interestingly, housing stock on market for sale has been declining – it’s well below GFC highs and in a very clear down trend. But at the same time, asking prices have also declined substantially. Over the last 12 month period, asking prices are down by 25% for houses and 33% for units. Substantial declines are also evident across more recent time frames of week, month and quarter.

Dysart QLD, 4745

This is another coal mining town in QLD. The main mine in town, the Norwich Park Mine, closed on 11^th April 2012 after 32 years. It was reopened in Saraji Mine 26km north of the town. But a more recent event has caused the residential vacancy rate to rise quickly. It’s now at 11%, which is actually well down off its highs of almost 20% earlier in the year.

Asking rents have also fallen over the last several years with houses recording a -52% decline and units a -40% decline in asking rents. Prices appear to have stabilized over the last year.

Stock on market reached its peak in late 2012 and has stabilized in 2013. So whilst no further stock was building up on the market, the current levels aren’t clearing either. At the same time, asking sale prices have experienced reasonably high declines of around 17% for both houses and units over the last year. The decline in asking sale prices has stabilized more recently.

Emerald QLD, 4720

The final town I wanted to cover in QLD is Emerald. This is the main services town for a large number of industries in the region – mostly coal mining, but also cotton and other agricultural industries.

Similarly in Emerald, the residential vacancy rate has increased very quickly over the last eight months. It’s gone from virtually zero at the start of the year to 7.4% in November. The rise has been striking from one month to another (March to April) – which seems an unusual move. But asking rents are confirming that there has been growing vacancies with asking rents declining by 35% for houses and 37% for units over the last year. Prices appear to have stabilized over the last month and quarter though.

Further evidence of a soft housing market is the growing volume of unsold stock on market. There has been a reasonably substantial increase since late 2012. But at the same time, asking sale prices are only down by 4% for both houses and units over the last year.

South Australia

Roxby Downs SA, 5725

This is the site of the Olympic Dam mining centre producing copper, uranium, gold & silver. Plans to expand the mine by BHP Billiton were postponed indefinitely in August 2012 pending investigation of a “new and cheaper design”.

It’s not a surprise to see the residential vacancy rate go from almost zero prior to that, to now over 8%. The vacancy rate in Adelaide is only 1.4%. At the same time, asking rents have seen a substantial decline over the last year, falling by 33% for both houses and units. Prices over the last month appear to have stabilized somewhat.

Unsold stock on market has seen a steady increase since mid-2012, but levels are still below that of the GFC period. Asking sale prices have seen only a very small (compared to other mining markets) decline over the last year of -6% for houses and units. The weakness appears to be more in the rental market at this stage.

In the context of the current level of housing activity in capital cities and other urban areas, it’s shocking to see growing vacancy rates and declining rent and house prices in these mining centres. Although we are talking about small markets, the implications for the economy are large. Falling demand for housing in these centres indicates a shift away from the more labour intensive investment phase of the boom. This wouldn’t be a worry if overall business investment was poised to take the place of mining investment activity. But it’s not and this is precisely the issue that the RBA has been hoping to address by easing interest rates.