ABS – Page 48 – Digital Finance Analytics (DFA) Blog

Economy declines 0.5 per cent in September quarter

The ABS says the volume of activity in the Australian economy decreased 0.5 per cent in the September quarter 2016, the first quarter of negative growth since the Queensland flood affected March quarter 2011. Through the year growth remains positive at 1.8 per cent, reflecting the three previous quarters of growth.

This is worse than expected. So bad, there must be some questions asked about the data – for example a -0.3% “statistical adjustment”? But a rise in imports, fall in building activity, fall in household savings, and goverment spending, all could not offset a rise in household spending and agricultural exports. Another fall next quarter would make a recession, but we suspect there will be some reversals next time.

Economic activity contracted in a number of areas this quarter. Private investment in new buildings detracted 0.3 percentage points from GDP growth, while new engineering and new and used dwellings detracted 0.2 and 0.1 percentage points respectively. Public capital expenditure detracted 0.5 percentage points from growth as it declined from elevated levels in the June quarter. Net exports detracted an additional 0.2 percentage points from growth. Australia’s terms of trade rose 4.5 per cent through the September quarter.

The reduced building activity is reflected in the output of the construction industry which fell 3.6 per cent for the quarter and was the largest contributor to the fall in GDP growth on an industry basis. A number of other industries also recorded below trend growth, or declined, this quarter, including financial and insurance services, professional scientific and technical services, rental hiring and real estate services and administrative support services. The largest offset to these falls was agriculture which grew 7.5 per cent. Mining production contributed no growth, but maintained its historically high levels of production.

Subdued activity in the building industry contributed to a decline in the income of small businesses, with gross mixed income down 5.8 per cent. Private non-financial corporation’s gross operating surplus increased 1.2 per cent, supported by stronger mining commodity prices. Compensation of employees increased 1.3 per cent, and real gross national income increased 0.9 per cent for the quarter to be 3.2 per cent higher through the year.

Household final consumption expenditure increased 0.4% in seasonally adjusted terms. This was driven by a rise in Hotels, cafes and restaurants (2.2%) and Insurance and other financial services (1.3%). Government final consumption expenditure decreased 0.2% in seasonally adjusted terms.

Exports of goods and services increased 0.3% in seasonally adjusted terms. Seasonally adjusted Exports of goods fell 0.3%, with Non–rural exports down 1.2%. Non–monetary gold up 7.4% and Rural exports up 1.0%. Exports of services rose 2.4%. Imports of goods and services rose 1.3% in seasonally adjusted terms. Seasonally adjusted Imports of goods rose 0.8% with rises in Capital goods (3.5%), Intermediate goods (1.7%) and Non–monetary gold (22.5%). Consumption goods fell (–3.3%). Imports of Services were up 3.3%.

Dwelling investment fell 1.4% in the September quarter 2016 driven by New and Used Dwellings (down 1.6%) and Alterations and Additions (down 1.0%). The decline this quarter can be partly attributed to high rainfall levels. Through the year growth was still high at 7.2% and Private sector residential building approvals were more than $20.4b in original current price terms for the quarter, 9.4% higher than September quarter 2015. New building investment exhibited its strongest quarterly fall since September 2009 this quarter (falling 11.5%). The finalisation of construction projects as well as less construction work coming online drove this decrease.

The Household saving ratio was 6.3% in seasonally adjusted terms in September quarter 2016, down from the 6.7% figure recorded last quarter. This decline was driven by a reduction in small business profits (Gross mixed income down 5.8%). The result occurred despite growth in wages and below trend growth in Household consumption.

Worth noting that the real net disposable income per capital lifted a little, so not all bad news.

Retail Turnover Holds Up

Australian retail turnover rose in trend terms, 0.4 per cent in October 2016 following a 0.4 per cent rise in September 2016. Compared to October 2015 the trend estimate rose 3.3 per cent.0.5 per cent in October 2016 according to the latest Australian Bureau of Statistics (ABS) Retail Trade figures.

In seasonally adjusted terms, retail turnover rose 0.5 per cent in October 2016, seasonally adjusted, following a 0.6 per cent rise in September 2016.

In seasonally adjusted terms, there were rises in food retailing (0.6 per cent), household goods retailing (0.7 per cent), other retailing (0.8 per cent) and cafes, restaurants and takeaway food services (0.4 per cent). There were falls in clothing, footwear and personal accessory retailing (-0.4 per cent) and department stores (-0.4 per cent) in October 2016.

In seasonally adjusted terms, there were rises in Queensland (0.8 per cent), Victoria (0.5 per cent), New South Wales (0.3 per cent), Western Australia (0.4 per cent), the Australian Capital Territory (0.9 per cent), Tasmania (0.6 per cent) and the Northern Territory (0.3 per cent). South Australia (-0.1 per cent) fell in seasonally adjusted terms.

Online retail turnover contributed 3.9 per cent to total retail turnover in original terms.

Capex Off Again

The ABS released their September data on Private Capex spending. The trend volume estimate for total new capital expenditure fell by 4.9% in the September quarter 2016 while the seasonally adjusted estimate fell by 4.0%.

Within that, the trend volume estimate for buildings and structures fell by 8.5% in the September quarter 2016 while the seasonally adjusted estimate fell by 5.7%. On the other hand, the trend volume estimate for equipment, plant and machinery rose by 1.0% in the September quarter 2016 while the seasonally adjusted estimate fell by 1.9%.

The trend estimate for Mining fell 13.2% in the September quarter 2016. Buildings and structures fell 13.4% and equipment, plant and machinery fell 4.0%. The seasonally adjusted estimate for Mining fell 7.2%. Buildings and structures fell 7.7% and equipment,plant and machinery fell 3.1% in seasonally adjusted terms.

But taking a longer view, and across states we can see the real problem the economy has. We see significant falls in capex (current prices) in WA and QLD. Despite attempts to sure up momentum, using housing construction, the gap is just too big. This is a plot of buildings and structure investment flows.

It also appears WA has further to fall, to revert to more normal levels. We conclude that the fall in mining investment is just too large to be replaced by dwellings, and in any case, we saw yesterday, approvals are also falling.

So, where will future growth come from? This does not bode well for future household income.

The ABS also notes:

Each September quarter, the reference and base year for chain volume estimates for the Survey of Private New Capital Expenditure are updated. A new base year, 2014-15, has been introduced into the chain volume estimates which has resulted in minor revisions to growth rates in subsequent periods. In addition, the chain volume estimates have been re-referenced to 2014-15. Additivity is preserved in the quarters of the reference year and subsequent quarters. Re-referencing affects the level of, but not the movements in, chain volume estimates.As happens each year, a seasonal review has been undertaken based on estimates up to and including the June quarter 2016. This review has not resulted in noteworthy revisions to estimates up to and including June quarter 2016. There are no noteworthy revisions to previous estimates.

Dwelling Approvals Fell In October

The ABS released their building approvals data for October today. The number of dwellings approved fell 3.3 per cent in October 2016, in trend terms, and has fallen for five months.

In trend terms, dwelling approvals decreased in October in South Australia (4.6 per cent), New South Wales (3.8 per cent), Queensland (3.6 per cent), Victoria (3.3 per cent), Western Australia (3.0 per cent), Tasmania (2.6 per cent) and Northern Territory (0.2 per cent), but increased in the Australian Capital Territory (4.5 per cent).

Approvals for private sector houses fell 0.6 per cent in October, in trend terms. Private sector house approvals fell in South Australia (2.5 per cent), Western Australia (2.3 per cent), New South Wales (0.5 per cent) and Victoria (0.1 per cent), but rose in Queensland (0.4 per cent).

In seasonally adjusted terms, dwelling approvals decreased 12.6 per cent in October, driven by a fall in total other residential dwellings (23.5 per cent). Total house approvals fell 2.5 per cent.

The value of total building approved fell 1.7 per cent in October, in trend terms, and has fallen for three months. The value of residential building fell 3.2 per cent while non-residential building rose 0.8 per cent.

Australian Securitisation Remains In The Doldrums

The ABS released the latest data to September 2016. At 30 September 2016, total assets of Australian securitisers were $118.5b, down $4.8b (3.9%) on 30 June 2016. Lenders are using other funding channels, thanks to larger securitisation spreads.

During the September quarter 2016, the decrease in total assets was due to a decrease in residential mortgage assets (down $3.4b, 3.4%), other loans (down $0.8b, 4.9%) and; cash and deposits (down $0.3b, 7.0%).

At 30 September 2016, asset backed securities issued overseas as a proportion of total liabilities decreased to 3.8%, down 0.6% on the June quarter 2016 proportion of 4.4%. Asset backed securities issued in Australia as a proportion of total liabilities increased to 87.2%, up 0.4% on the June quarter 2016 proportion of 86.8%.

Note the ABS proposes to move the release date of Securitisers from the December 2016 quarter onwards to align closer to the release of Australian National Accounts: Finance and Wealth (cat. no. 5232.0). Dependant on feedback, future release dates will be three weeks prior to the release of Australian National Accounts: Finance and Wealth, with the exception of September quarters which will be released two weeks prior.

Managed Funds Industry Now Worth $2.8 Trillion

The ABS released the latest Managed Funds data to September 2016. The managed funds industry had $2,774.5b funds under management, an increase of $59.0b (2%) on the June quarter 2016 figure of $2,715.5b.

The main valuation effects that occurred during the September quarter 2016 were as follows: the S&P/ASX 200 increased 3.9%; the price of foreign shares, as represented by the MSCI World Index excluding Australia, increased 4.3%; and the A$ appreciated 2.7% against the US$.

At 30 September 2016, the consolidated assets of managed funds institutions were $2,182.8b, an increase of $45.3b (2%) on the June quarter 2016 figure of $2,137.5b.

The asset types that increased were shares, $46.2b (8%); overseas assets, $41.2b (10%); bonds, etc., $10.5b (9%); deposits, $8.8b (3%); short term securities, $6.5b (6%); land, buildings and equipment, $3.0b (1%) and loans and placements, $0.8b (2%). These were partially offset by decreases in units in trusts, $65.2b (29%); other financial assets, $5.9b (14%); other non-financial assets, $0.4b (4%) and derivatives, $0.3b (7%).

At 30 September 2016, there were $490.0b of assets cross invested between managed funds institutions.

At 30 September 2016, the unconsolidated assets of superannuation (pension) funds increased $56.3b (3%), cash management trusts increased $1.5b (4%), public offer (retail) unit trusts increased $1.2b (0%), friendly societies increased $0.3b (4%) and common funds increased $0.2b (2%). Life insurance corporations decreased $69.7b (24%).

A State View Of Residential Construction

The ABS released their preliminary data on construction work done. It shows the seasonally adjusted estimate for total construction work done fell 4.9% to $46,147.8m in the September quarter.

The seasonally adjusted estimate of total building work done fell 5.7% to $25,886.6m in the September quarter.

The seasonally adjusted estimate for engineering work done fell 3.8% to $20,261.3m in the September quarter.

However, looking at the residential construction, we see the fall is not uniform across states. There were significant falls in VIC and WA, whilst in NSW and QLD residential construction activity continued to grow.

Within this, houses played a major part…

… whilst other residential construction (apartments and units) fell.

Non residential construction also fell across the states.

Employment Rate Stable, But…

The data from the ABS today shows an unchanged headline unemployment rate of 5.6%. However, trend employment decreased 1,000 to 11,946,600 and unemployment decreased 4,100 to 708,600. The participation rate decreased 0.1 pts to 64.5%. The monthly hours worked in all jobs increased 3.2 million hours to 1668.0 million hours.

We see more choosing to sit out of the market all together, and continued under utilisation. So while the headline is OK, the employment market dynamics remain a concern.

Note that last month the ABS observed that the incoming rotation group was considerably different to the rest of the Queensland sample and its influence was reduced as part of the estimation process.

The ABS has further reviewed the treatment of September’s incoming rotation group in Queensland and confirmed that the characteristics observed in September are relatively consistent with those observed in October, suggesting that last month’s data were representative of the new group. Its influence has therefore been restored, resulting in revisions to September estimates for Queensland and (to a lesser extent) Australia.

Wages Growth Tanks Again

The ABS data released today shows that in the September quarter 2016, the Private sector index rose 0.4% and the Public sector rose 0.6%. The All sectors quarterly rise was 0.4%.

Through the year, All sectors rose 1.9%, a new low for the series. The Private sector through the year rise to the September quarter 2016 of 1.9% was lower than the Public sector rise of 2.3%.

Australia/Sector (original)

September quarter wages growth was mainly influenced by increases to the national minimum wage and modern awards; regularly scheduled enterprise agreement increases; and salary reviews timed to coincide with the financial year. Of note, the 2015-16 Fair Work Commission decision increased the minimum wage and modern awards by 2.4%.

In the September quarter 2016, wages grew 0.7% for All sectors. Wages grew 0.8% in the Private sector and 0.9% in the Public sector.

The All sectors through the year rise was 2.0%. The Private sector rose 1.9% for the second quarter in a row, continuing the lowest through the year rise since the beginning of the series in September 1998. The Public sector rose 2.3%.

State/Territory (original)

In the September quarter 2016, the largest quarterly rise of 1.1% was recorded by Tasmania and the Northern Territory. The lowest quarterly rise of 0.5% was recorded by the Australian Capital Territory.

Rises through the year ranged from 1.7% for Western Australia to 2.3% for South Australia.

In the Private sector, the quarterly rise of 1.2% for Tasmania was the highest quarterly rise of all states and territories. The lowest quarterly rises of 0.4% was recorded by Western Australia.

Rises through the year in the Private sector ranged from 1.5% for Western Australia and the Northern Territory to 2.4% for Tasmania. Western Australia has recorded through the year growth of less than 2.0% since March quarter 2015.

In the Public sector, the Northern Territory recorded the highest quarterly rise (2.0%) of all states and territories. This was the largest rise for the Northern Territory since the December quarter 2009. Queensland and the Australian Capital Territory recorded 0.2%, the lowest of all states and territories. Changes in the timing of pay increases awarded under enterprise agreements can influence quarterly wages growth.

The Northern Territory recorded the highest through the year Public sector rise of all states and territories (3.6%) and Australian Capital Territory recorded the lowest (1.8%).

In the Private sector, Accommodation and food services recorded the highest quarterly rise of 1.7% and Mining the lowest growth over the quarter (0.1%). Rises through the year in the Private sector ranged from 1.0% for Mining to 2.5% for Electricity, gas, water and waste services.

Two Private sector industries recorded the lowest through the year growth since the start of the WPI: Mining; and Administrative and Support Services. Other resource related industries such as Construction and Professional, scientific and technical services recorded low through the year growth 1.7% and 1.6%, respectively, in the current quarter.

In the Public sector, Public administration and safety recorded the highest quarterly rise of 1.1%. Electricity, gas, water and waste services, Professional, scientific and technical services and Education and training recorded the lowest wages growth of 0.6%. Rises through the year in the Public sector ranged from 1.2% for Professional, scientific and technical services to 2.4% for Education and training.

Investment Lending Stronger In Latest Finance Data

The latest data from the ABS on all lending flows shows the continued rise in investment housing, offset by a fall in owner occupied lending, and a small rise – housing apart – in commercial finance. Growth, other than for investment housing is insipid. We are walking a tightrope.

Overall lending flows, in trend terms, rose 0.1%, to $66.9 bn. Owner occupied housing commitments excluding alterations and additions fell 0.5% in trend terms. Total personal finance commitments fell 1.5% (within which revolving credit commitments fell 3.7%, and fixed lending commitments fell 0.1%). Total commercial finance commitments rose 0.6% with fixed lending commitments up 1.0%, while revolving credit commitments fell 0.6%. The value of total lease finance commitments rose 1.0%.

But looking at commercial lending (which includes both lending to investment property purchasers, and lending for other commercial purposes) we see lending for housing investment rose a massive 1.3% to $12.2bn, whilst lending for other commercial purposes rose 0.7% to $19.1bn. So the strongest growth was in investment housing.

As a result, the key ratios show a rise in investment lending as a proportion of the total, to 18.3%, a fall in owner occupied lending at 30.2% and non housing commercial up a little at 28.6%. Clearly without the surge in investment lending, total lending would have fallen.

The same story is told looking at the more detailed housing series. Investment lending rose from 37.2% to 37.6% of flows ($12.2 bn), whilst refinance fell slightly to 20.8% ($6.7 bn). Funding for new buildings for owner occupied, and construction rose 0.4% ($2.8 bn), whilst purchase of established dwellings fell 0.8% and refinance ($6.7 bn) fell 0.5%.

On the investment side, new construction fell 8.7% (0.9 bn) whilst purchase of existing housing stock rose 2.4% to $10.2 bn. The momentum was strongest in NSW and VIC.

This shows the dilemma for the RBA. The main growth engine in terms of credit is investment lending, yet this is the higher risk, and more concerning area of lending because if capital growth were to slow or reverse many investors would vote with their feet. We are on the edge of a precarious ridge, on one side is the slide into risky lending, on the other is the need for growth (at any cost). The pathway appears to becoming narrower, and the room more maneuver smaller. It is “the sharp edge” of policy.

We need to find a way to boost business lending, other than for investment housing. Current settings do not help. Cutting rates further will not either, and in all likelihood, the next turn in interest rates will be higher.