Economic Data Worse Than Expected - RBA To Remain On Hold For Until At Least 2020
Shane Oliver | Aug 30, 2018 14:48
Originally published by AMP Capital
- Residential building approvals fell 5.2% in July with public approvals down 33.6%, but private approvals also down with houses -3% and units -6.6%.
This was worse than the market expected. Home building approvals remain high but momentum is weak and consistent with the housing construction cycle having peaked. The trend in alterations and additions and in non-residential approvals is also soft.
- Real private new capital expenditure (or business investment) fell by 2.5% in the June quarter driven by a 3.9% fall in buildings and structures and a 0.9% fall in plant and equipment.
This was also worse than market expectations which had been for a small rise. While manufacturing investment rose 2.8%, mining investment fell 7.2% and other industries saw a 0.9% fall.
More significantly while business investment plans for 2018-19 were upgraded and came in a little bit stronger than market expectations, they still point to soft investment this financial year. For example, investment plans for this financial year are still down 1% on plans a year ago for 2017-18 suggesting that while the big slump in investment seen over 2014 to 2017 is over, momentum is still weak.
The weakness in investment plans still largely reflects mining investment (which is projected to fall between 4% and 16% this financial year depending on how the data is interpreted), but the good news is that as a share of GDP its back to the normal range it was in prior to the mining investment boom so is probably close to the bottom – see the next chart. This is also suggested by anecdotal evidence suggesting some new mining projects on the horizon. So the big drag on economic growth from the slump in mining investment is getting close to the end.
Non-mining investment plans are a bit more positive and point to growth of around 0.5% over this financial year. The problem is that it’s still very weak.
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While its mainly the plant and equipment data from the capital spending report that will feed into June quarter GDP data, and today’s data excludes key services sectors like health and education, it nevertheless suggests that business investment was a bit soft in the June quarter consistent with GDP growth around 0.7% or so.
More broadly, the softness seen in building approvals and business investment plans for this financial year is consistent with out view that the RBA will be on hold out to 2020 at least. Westpac’s decision to raise its mortgage rates with other big banks likely to follow is also a de-facto monetary tightening and adds to the case for the RBA remaining on hold. In fact, given these developments along with falling home prices in Sydney and Melbourne there remains a significant risk that the next move in rates is down, not up.
Building Approvals
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