Most of the new information that we get this week on the Australian economy concerns the housing sector. But, in the run up to the RBA’s meeting on February 7, we are unlikely to learn anything of any substance that we don’t already know. The property market is pretty weak, that much is clear.
Credit growth for instance has been hovering around recessionary growth rates for some time. Massive deleveraging across the community would be the general perception, given our apparently huge amounts of debt. I’m not sure that this is really the case though, especially considering that your average Australian doesn’t have a lot of debt. ABS data (for 2010) suggests that the average value of mortgage loans outstanding is about $68,000.
Now, that’s across all households, and considering that two-thirds of Australian households don’t have a mortgage then for those who do the debt burden rises to about $200,000. Breaking that down another way, ‘middle wealth’ (middle 20 per cent) households have about $90,000 left on their mortgage, while high wealth (top 20 per cent) have $60,000. Admittedly that is only for owner-occupied housing so, when you consider all debt, mortgage outstanding rises to $128,000 for middle income and $180,000 for high. That stands against cash, super and share balances of about $77,000 and $553,000 respectively (middle and high wealth). With that in mind, I’m not really of the view that debt is a massive problem in Australia and I think this is consistent with RBA research which has shown that 75 per cent of all debt in Australia is held by the top two income quintiles. Maybe within those income quintiles there is some deleveraging. But given those income quintiles have quite a lot in the way of assets – even liquid assets and obviously income – I think the issue is often overstated.
More generally, Australian households are well placed to expand credit demand should they want to – if there is good cause. And this is the issue for mine. There isn’t really great cause at the moment with house prices stagnant and equity markets not really doing anything either. I appreciate there is a bit of a circularity there, but my point stands. The fundamentals for credit growth, the way I see them, are really quite good. Income growth is robust, savings high and the unemployment rate is low. The only headwind is confidence. Unfortunately, Australian confidence is shot. It’s lower than in Germany, a country that is actually flirting with a recession – which I find remarkable. But the common misperception is that the Australian economy is weak and while this remains the case, credit growth and the property sector more broadly will likely remain soft. It’s not like the price of credit is a problem anyway, given mortgage rates are very low relative to history.
Building approvals (out Thursday at 1130 AEDT) had been the big worry for mine. Recall they effectively collapsed in the September/October period, down some 25 per cent before a modest uptick in November of about 8 per cent – this appears to be more a supply-side credit issue, rather than a demand-side one for households. The cause is the same though – low confidence, risk aversion etc. The consensus is that approvals will bounce about 2 per cent again in December so we’ll see what happens. Other than that, we see RP Data-Rismark’s December house price series tomorrow at 1030 AEDT, while the ABS fourth-quarter house price series is released on Wednesday. December trade data then comes out on Thursday (1130 AEDT).
Looking abroad, the US punches out some hard-hitting data. The ISM index on Thursday is expected to rise to 54.5 in January from 53.9, while payrolls on Friday are forecast to rise 150,000 – the unemployment rate forecast steady at 8.5 per cent. It’s worth noting that the BLS will be putting through their annual revisions to the establishment survey, from which the unemployment rate is derived. Similarly the ISM are going through their annual revisions – so watch out for any changes.
So far we know that the US economy is growing at a reasonable clip – 2.8 per cent in the December quarter which is just above average (2.4 per cent) and that’s with a 1 percentage point detraction from government spending (mainly state and local government). Moreover, 3.2 million private sector jobs have been created in this recovery so far which compares well to past episodes. The good news, Europe aside, is that there aren’t too many headwinds to this growth. Apart from the ISM and employment data, it’s worth watching income, spending and inflation data tonight. The PCE deflator currently sits well above the Fed’s target of 2 per cent at 2.5 per cent year-on-year, but is forecast to fall to 2.3 per cent year-on-year in December. Otherwise we see a few lower-tier manufacturing surveys – Dallas, Chicago and Milwaukee.
Outside of the US, the Chinese PMI is out on Wednesday and expected to stay around the 50 mark – just below. In Europe, we see German CPI tonight and employment data tomorrow. There are a few bits and pieces otherwise – the Fed’s Bernanke speaks to House Budget Committee on Thursday night, ECB’s Weidmann on Wednesday night and of course events in Europe. News is that a deal between Greece and her creditors will be struck this week and we have another eurozone leaders meeting.
That’s probably the main stuff. Before I sign off, it's interesting to note legislation currently being considered in the UK. A draft law has been written up that would "give the Chancellor of the Exchequer the power to direct the Bank of England to Act". This is supposedly only during a crisis (to reduce or resolve a serious threat to financial stability) or when taxpayers' money is at risk. Interesting nevertheless given the blurred lines between monetary and fiscal policy in many countries. Not the last step in this process I’d bet.