SCOREBOARD: The real economy
Key economic indicators this week might show an economy with challenges, but the underlying strengths are still likely to be sound.
Now that’s not to say that the data this week uniformly suggest the economy is strong. That’s certainly not the case and building approvals (Thursday 1130 AEST) are a case in point. Down about 15 per cent over the year and nearly the same relative to the historical average, approvals are soft. But when I say soft, that doesn’t necessarily mean supportive of the 100 basis points worth of rate cuts that we’ve had. To see this, consider that from 2005-07 – henceforth called the ‘good years’ – private approvals averaged 12.8,000 per month. For the last 12 months we’ve averaged about 12,000 which isn’t that bad then. Houses are still being built, the sector is obviously not booming and so the average is down, but the price of money is not a restraining factor here. I suspect common sense is given that other countries who recently had a boom, like the US, Spain and Ireland, didn’t fare too well. But stuff it, let’s just keep on cutting rates, eh? For April’s figures, economists expect approvals to bounce 0.5 per cent after a 7.5 per cent spike the month prior.
Where we are seeing considerable strength is in the business investment space. Now as I warned prior to the fourth quarter national accounts, the problem with business investment as a key driver of growth is that it is volatile or lumpy. You get growth of 15 per cent one quarter, it falls 5 per cent the next. This of course means you can get quite weak quarters of growth even while trend growth is very strong. That’s exactly what we saw in the fourth quarter, when business investment fell. This in turn weighed on GDP leading to all sorts of alarming claims. But surveys continue to find, and ABARE's figures last week show this, that business investment remains very strong, and will continue to support growth for some time. There can’t be any intelligent debate about this. Capex figures out this Thursday (1130 AEST) are expected to show investment rebounded 4 per cent for the quarter. Likely mining investment will be strong, and so I’m going to be most interested in what the non-mining sectors do. There is this perception that non-mining investment is weak. This is not true.
On the retail sales front we know the evidence is more mixed, but when arguing a view it’s about what evidence you want to look at and which is more reliable. Anecdotes and this monthly retail number suggest sales are weak – well below trend. I have outlined for a while now why this is not actually the case and why you can’t rely on either of these to make an assessment of the industry. As a brief recap this includes price deflation, competition in some sectors and the survey limitations (sample scope, seasonal adjustment issues) of the monthly retail survey. This weighs on the figures and allows headline grabbing and completely misleading statements like – ‘retail spending at its weakest in 50 years’, etc. This is very obviously not true which is why the national accounts (which is much broader in scope than the monthly retail figures) and company accounts show consumer spending is much stronger – running at a trend pace or just above in some cases. As far as anecdotes are concerned these have been polluted by lazy business leaders who are trying to rely on policy levers to provide sales growth, rather than relying on hard work – tackling price gouging landlords and suppliers, being competitive, embracing, not fighting, technology, lifting productivity and being more efficient. For what it’s worth, the monthly retail survey (Wednesday 1130 AEST) did show a rebound in March and strong sales in the March quarter. For April, economists expect growth of 0.2 per cent.
Outside of Australia, there are a few bits and pieces but the US puts out its key data on Friday (don’t forget it's Memorial Day Holiday in the US tonight so markets are closed). Payrolls, the ISM and PCE deflator are all due on the same night so it’s going to be a big one on Friday. In terms of forecasts, economists are looking for a 150,000 rise in payrolls, the unemployment rate is expected to remain at 8.1 per cent, while the PCE deflator is expected to remain steady at 2 per cent year-on-year in April. I’m sure Europe will provide no end of excitement but as far as I can tell the major meetings are economic conferences to be held later this week.
Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
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