Output

Credit deceleration in Australia should be ringing alarm bells – April 2017

Today, the RBA released its Lending and Credit Aggregates showing that growth in new credit (total private sector) in Australia has continued to slow in the latest month. In April 2017, the annual growth in new private sector credit declined by -$29.8b. In other words, there was $29.8b LESS private credit growth in the year to April 2017 than in the year prior. This doesn’t mean that the stock of outstanding credit is declining (that would be deleveraging), at this stage it means that credit growth has been slowing.

New credit, together with income growth, drives new spending in the economy.

With regulators and media (rightly) focused on reigning in the riskier mortgage credit, namely interest-only mortgages, there has been absolutely no focus on the worsening state of business credit growth. I work on the premise that business spending and investment supports future economic growth and improvements in labour market conditions. So, when I see a chart that shows business credit continuing to decelerate, then it makes me rethink my expectations for economic and employment growth.

The main driver of the slowdown in overall private sector growth in new credit has been the decline in new credit for business. Not even the acceleration in investment mortgage credit has been enough to drive the overall impulse higher, with total annual growth in new credit for mortgages only reaching +$7b in April:-

Source: RBA, The Macroeconomic Project

A longer term perspective highlights just where we are in this cycle, and it’s not good.

In dollar terms, the overall annual decline in new private credit is now larger than it was in the previous downturn of 2012/13. At that point in the cycle, the annual decline in new credit reached -$28.9b at its lowest point. As a % of GDP, it was approx. -1.9% of GDP in size. Although the current dollar amount is slightly larger, -$29.8b, it’s also a slightly smaller % of GDP about -1.7% of GDP (using a rosy GDP forecast).

Source: RBA, The Macroeconomic Project

Remember why credit growth started to accelerate again in 2013? A series of eight (8) official cash rate cuts by the RBA between Nov 2011 and Aug 2013 (-225bps in total) and the acceleration of Chinese credit growth. New credit growth started to accelerate for both business and mortgage credit. Which is why it’s surprising not to see more commentary about the slowing growth in business lending in this part of the cycle.

The annual growth in new credit for business started decelerating back in mid-2016. In dollar terms, the level of deceleration has surpassed the low of 2013. But as a % of GDP, the current annual decline in new credit for business is just shy of that post-GFC low, -2.02% in April 2017 versus -2.14% in June 2013.

Source: RBA, The Macroeconomic Project

In recent posts on this topic, I’ve given this deceleration in business credit growth the benefit of the doubt. The improvement in business profits (led by Mining) over the last few quarters may have cushioned some of this slowdown in new credit growth. But with commodity prices now off again and with consumer spending and labour market metrics looking lackluster, it’s not likely that we’ll see continued high growth in business profits. So without growth in new credit, what will be supporting at least more stable economic growth? We’ve seen hours worked grow by a mere +0.07% in the first quarter of the year (in the Dec quarter aggregate hours worked grew by +0.46%), indicating that activity may be slowing.

Despite the picture I’ve painted here, business sentiment and reported business conditions indices are at multi-year highs. It’s difficult to explain the disparity between improving business confidence & reported conditions and the slowing growth in new credit for business. I would have thought that improving business confidence would translate into decisions to invest and spend. But even the NAB survey for the month of April has a rather large pull back in capex:-

Source: NAB

Maybe business was waiting on the budget outcome in May. Either way, this ‘optimism’ hasn’t translated into better labour market conditions – underemployment continues to rise, unemployment remains elevated and growth in aggregate hours worked is flat.

And in the irony of all ironies, the one area where regulators are focusing efforts to slow lending, investor mortgages, the growth in new credit continues to accelerate. The annual growth in new credit for total mortgages of +$7.6b is the product of 1) continued deceleration in owner occupier credit (-$31b annual decline in new credit) and 2) the continued acceleration of investor lending from +$33b in March to +$38.9b annual growth in April. We are yet to see any slow-down in investor-led activity reflected in the data. Most measures to curb interest only lending only started to come into effect during April.

Whilst it’s the right idea to reign in riskier interest-only lending, know that this is going to happen now against a backdrop of slowing annual new credit growth across the board – business, owner-occupier mortgages and personal credit. Slowing our rate of debt growth isn’t a bad thing, but it comes at a price when economic output growth relies so heavily on accelerating credit growth.

New credit, together with income growth, drives new spending in the economy.

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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.

 

 

 

 

 

 

 

 

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: www.macrobusiness.com.au)

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.