Growth crusaders need a little faith

Relying on construction, housing and retail for growth is like stepping onto an as yet unseen bridge. But the latest data reinforces reasons for optimism.

There is a scene in the movie Indiana Jones and the Last Crusade where Harrison Ford is standing on the edge of a rocky abyss. His path leading to the Holy Grail continues on the other side, but he can see no bridge.

“Impossible, nobody can jump this,” he exclaims. “It’s a leap of faith.”

The camera cuts away to Sean Connery, playing Jones Senior, who urges “You must believe boy, you must believe”.

Hand on heart, Indi extends a leg and steps forward... finding a firm footing on a hitherto invisible bridge between the two sides of the abyss.

The Australian economy is in the middle of making an Indiana Jones-style leap of faith. We’re just not quite sure, yet, if there is a bridge.

There is more than a little uncertainty that we can successfully make the leap from a decade of mining-sector fueled growth to a recovery in construction, housing and retail.

But believers can take some encouragement from yesterday’s business investment and new home building reports.

True, private capital expenditure fell by a precipitous 4.7 per cent in the first three months of the year, three times the magnitude of the 1.5 per cent anticipated decline. But the fall in spending was, as expected, due mainly to mining. Investment by the manufacturing sector was off just 0.8 per cent leading into Ford Australia’s announcement that it will cease manufacturing in Australia. Investment actually increased in the consumer sensitive sectors of retail and media and communications.

And investment intentions are not falling off a cliff.

According to the second set of estimates for 2013-14, mining sector executives expect to spend $100 billion, and non-mining sector to spend $54 billion.

Given the tendency of executives to underestimate, spending could be more like $180 billion.

This would represent total nominal capex growth of around 10 per cent next financial year. Sure, it’s not the 30 per cent growth we saw back in 2011-12. But it is a vast improvement on the 3 per cent growth in capex expected this financial year.

Late 2013 looks set to mark the peak in mining investment, but this peak is looking more like a plateau, thanks to the long tail of major LNG projects.

Meanwhile, signs of life in the housing construction industry.

New home building approvals jumped 9.1 per cent in April to be up 27.3 per cent over the year. The monthly move consisted of an 18 per cent jump in apartments and a 2.5 per cent rise in detached houses. Detached houses have risen for four months in a row.

There is a tendency to discount apartment buildings as a small and volatile component of activity. But apartment living is on the rise in Australia. And although apartments are smaller in square meterage, they still mean the formation of a new household, and the associated spending on new furniture and homewares needed to fill it.

Australia’s population continues to grow by about 300,000 a year, compared to dwelling approvals of 165,000 suggesting some upside for either future construction or prices.

Either way, that should provide some support to jobs and confidence in the housing sector.

Of course, all these figures predate the recent 7 per cent fall in the Aussie dollar and last month’s surprise rate cut.

Ultimately, in the transition towards a housing- and retail-led economy, the level of interest rates is important. Monetary policy is not dead yet. Changes in interest rates have an “announcement” effect, but it is the level that determines disposable incomes and spending power.

Sure, confidence is fragile. But here, another impending leap of faith, to an Abbott government will be important.

There can be little doubt that big business is holding off on some investment decisions until they know the outcome of the election. The election of an Abbott government and the abolition of the carbon and mining taxes could be mildly positive for some mining and manufacturing firms.

But most important will be the definitive end to Australia’s destabilising three-year experiment with minority government.

That uncertainty will end on September 14 and businesses are likely to get a confidence boost.

This will remove a major source of weakness in employment intentions, which could, in turn, make consumers more confident about their job futures.

They could then start spending that massive warchest of savings they’ve been building since the GFC and the onset of ultra-low interest rates.

There has been a lot of gloomy talk recently about closure of Ford Australia and cleaning firm Swan Services. But they say the night is darkest just before dawn.

Is that a bridge I see?

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