SCOREBOARD: Credit diversion

Today's weak investment print lowers expectations for GDP, but it won't change the Reserve Bank's rates outlook.

The data:

– Australian construction work done fell 4.6 per cent in the December quarter, which was much weaker than the 0.8 per cent fall forecast. This follows an 11.7 per cent increase in the third quarter while in annual terms, construction work done is 9.2 per cent higher.
– Retail sales rose 0.3 per cent as expected in January following a 0.1 per cent fall in December. Annually, sales are 2.7 per cent higher.
– The Reserve Bank’s credit numbers show total credit rose 0.2 per cent in January. Housing credit was up 0.5 per cent, while business credit fell 0.2 per cent.

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What the data means:

Well, as expected, the Aussie data today had a softer tone, although there does seem to be a measure of relief in the Australian dollar market that retail sales didn’t fall this month – and so the bid was on. As I mentioned on Monday, there is a risk of an overreaction to the weak investment numbers, as they were significantly weaker than expected (which was always the risk following a very strong third quarter).

My concern in this environment is that weaker investment numbers, even if they are due to base effects and not reflective of a broader trend, could give rise to fears over economic growth. That material slowing is what the Reserve Bank referred to. Certainly the softer print lowers my GDP forecast materially (currently at 0.8 per cent), although there are a number of partials still to come out, so I’ll save the final forecast till later.

We get the capex numbers tomorrow and for the fourth quarter GDP outcome, the relevant component is plant and equipment. If this falls as well – which is very possible after very strong growth in the third quarter – then GDP could be quite soft for the quarter. Or at least private demand could be quite soft. I can’t help but think this may lead some to think the economy is slowing ‘materially’ and so it could reignite calls for more rate cuts. I think coming into the fourth-quarter GDP figures, the investment numbers support pricing going in that direction.

As it is, today’s construction numbers show private engineering construction down almost 7 per cent, but this is after a 35 per cent increase in the third quarter. Specifically, construction was down 24 per cent in Western Australia after a 45 per cent increase in the third quarter. Construction then fell almost 2 per cent in New South Wales after a 6 per cent increase in the third quarter. It rose in other states. Nothing to worry about then, it’s just volatility and we know there is still an enormous amount of work in the pipeline. Similarly, private building construction was down 4.2 per cent in the quarter reflecting a 1.7 per cent fall in private residential construction and a 9 per cent fall in private non-residential construction.

Retail was soft as expected, but we’ll have to wait till the national accounts to get the full picture. For this month, sales were driven by a 4.3 per cent increase in takeaway, cafe and restaurant sales and a small increase in other and clothing. Other components were flat or fell (see chart below).

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For the RBA, today’s numbers – and even a soft GDP print due to investment base effects – won’t change the actually policy outlook. Investment is volatile or lumpy. Nevertheless, the clear risk is for some to interpret any softness as a ‘material slowing’. Pricing for near-term rate cuts could increase markedly as a result – stay tuned for tomorrow's capex data.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter

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