Key Economic Developments
Australian Industry Group | Jul 16, 2018 12:07
Australia’s leading indicators of business conditions were buoyant in June, with NAB’s monthly business conditions index remaining well above the long-term average and Ai Group’s performance indices indicating overall elevated business conditions. Results were positive across most industries although the retail sector continues to lag the performance of other industries in both the NAB survey and the Australian PSI.
Among consumers, confidence rose to its highest level in four years, with the Westpac-MI index of consumer sentiment rising 3.9% m/m to 106.1 points, indicating that the number of optimists outnumbered pessimists in the first weeks of July. This lift in sentiment largely reflects growing optimism about the outlook for the Australian economy.
ABS building activity data show that the number of new dwellings being built in Australia rose to a record high in the March quarter (Q1) 2018 with a solid backlog of work keeping activity levels elevated. More recently, the total value of housing finance increased by 0.5% m/m in May but was down 3.7% over the year, driven by a decline in housing finance commitments to investors (seasonally adjusted).
Looking ahead for the construction industry, the latest Australian Industry Group/Australian Constructors Association Construction Outlook survey (released twice-yearly) indicates that the total value of major project work will rise by 9.3% p.a. in 2018, followed by a further lift of 8.0% p.a. in 2019. Growth will be led by a strong pipeline of non-mining infrastructure in line with the significant growth impetus from public sector spending on transport infrastructure projects. However, the actual value of growth is likely to be tempered by rising cost pressures, particularly escalating energy input costs.
h2 NAB business conditions hold steady in June/h2NAB’s monthly survey of business conditions rose slightly by 1 point to +15 points in June and remains +9 points above the long-run average (results above zero indicate positive conditions in this survey). Business conditions in the NAB survey remain closely aligned with buoyant results across Ai Group’s Australian PMI, PSI and PCI in recent months (see Chart 1).
Sub-indices in the NAB survey indicated that trading conditions (sales) and profitability accelerated in June, remaining well above their historical averages. The employment sub-index fell for the second consecutive month but is still at a level consistent with jobs growth of around 20,000 per month. Despite easing in June, new orders and high capacity utilisation suggest non-mining industrial activity is set to strengthen through the remainder of 2018.
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Despite a large fall in June, conditions in the mining sector remain the highest of all industries in the NAB survey (trend), reflecting resurgent commodity prices, rising export demand and improving productivity in the sector as projects ramp up to capacity. Across the other sectors, conditions improved in manufacturing, construction, wholesale and financial and property and business services in June. As in the Australian PSI, conditions in the retail industry continue to lag those of other industries. Across all states, conditions remain well above average and were most positive in South Australia and Tasmania while the weakest conditions were recorded in Western Australia.
The NAB business confidence index fell by 1 point to +6 points in June, easing back to its long-term average (+6 points). Confidence was highest in the mining and construction sectors and weakest in the recreation & personal services sector.
The Westpac-MI index of Consumer Sentiment jumped 3.9% m/m to 106.1 points in early July, indicating a clear improvement in mood amongst Australian consumers (results over 100 points indicate ‘net optimism’ in this survey). This survey has been indicating mild optimism (over 100 points) for the past eight months and rose to its highest level since November 2013. However, the overall level of sentiment is still below levels typically associated with robust consumer demand. It is also below the below the 108.3 points average recorded in the decade prior to the GFC.
Within this headline number, the Westpac-MI survey indicates that households are more optimistic about the economic outlook, despite escalating global trade tensions. The ‘economic outlook next 12-months’ and the ‘economic outlook next 5 years’ sub-indices both surged in June, with Westpac economists noting “this lift likely reflects developments around tax policy with the Government’s multi-year tax cut package passing into legislation in June”. The ‘time to buy a major household item’ sub-index rose 1.7% in July to 124.5 points, but is still below the long-run average (127.5 points) and levels associated with solid spending conditions.
h2 Dwellings under construction reach record high in Q1 2018/h2The ABS estimates the number of new residential dwellings currently under construction in Australia reached a record high in Q1 of 2018, rising 4.5% p.a. to 225,000 dwellings (Chart 2). This consists of 70,000 ‘new houses’ and 155,000 ‘new other residential buildings’ (mostly units and flats). Just under one third of all ‘other residential buildings’ currently being built in Australia are under construction in Victoria.
The volume of all building work done across Australia rose by 2.3% p.a. to $28.6bn in Q1 2018. This rise consisted of a rise in both residential and non-residential building activity. The volume of residential construction lifted in the March quarter, after two consecutive quarterly falls and is up slightly over the year (+0.9% p.a.). Non-residential construction fell 3.1% q/q but is up 4.9% over the year (seasonally adjusted and inflation adjusted).
In addition to this building activity, engineering construction work done rose 2.8% q/q in Q1 2018 to $23.7bn (seasonally adjusted and inflation adjusted). This took the total volume of all construction work done (residential, non-residential plus engineering construction) in Q1 to $52.3bn, up 7.2% p.a. (see Table 1).
More recently, the total value of housing finance increased by 0.5% m/m (seasonally adjusted) in May following a small 0.1% m/m fall in April. Over the year, housing finance was down 3.7% p.a., driven by a decline to housing finance commitments to investors. New investor loan commitments fell for the third month in a row to the lowest level since January 2016, declining 0.1% m/m to $10.7bn in May (seasonally adjusted). This indicates that regulatory measures to curb investor credit growth are having their intended impact. In May, investor lending accounted for 33.7% of all new loan commitments, the lowest proportion in over six years (Chart 3).
Weak housing finance results and the ongoing tightening of credit availability are likely to see building approvals continue to ease from here (see Economics Weekly 6 July 2018). The value of new housing finance approvals reached a record high in November 2017 but has been trending downwards since then. Housing finance is a reasonably reliable ‘leading indicator’ of residential building approvals (see Chart 4) and residential building activity, so this downward trend in finance approvals signals that demand for new residences is easing, albeit from high levels.
Looking ahead, the ABS estimates that the total value of building work (excluding engineering construction) in the pipeline grew by 12.2% p.a. in Q1 2018 (in nominal dollar values). This included work yet to be done on houses, other residences and non-residential building that is already under way (+11.1% p.a.) plus work that is planned but has not yet commenced (+15.4% p.a.).
This forward pipeline of building work (excluding engineering work) is valued at $95.8bn in Q1 2018. Although somewhat dated (Q1 2018) and in nominal values rather than inflation-adjusted volumes, these data confirm the forward pipeline of building activity is very large and is still expanding, albeit at a slower rate, across residential and non-residential sectors (Chart 5).
According to the latest Australian Industry Group/Australian Constructors Association Construction Outlook survey (conducted in March/April 2018), a strong pipeline of non-resources infrastructure activity is set to drive a continued solid uplift in major non-residential project work in 2018 and 2019. The Ai Group survey covers responses from Australia’s leading construction businesses and assesses the prospects for revenue from construction work across key major construction market segments. The survey found that the value of engineering construction work is expected to rise by 9.3% p.a. in 2018 and a further 8.0% p.a. in 2019.
Engineering construction will remain a key driver of growth with total turnover rising by 8.4% in 2018 and 12.6% in 2019. This reflects continued high levels of work done on major road and rail projects, led by various big-ticket projects across the eastern states. Solid support is also expected from telecommunications infrastructure (in line with NBN-related investment network upgrades) and “other” civil projects, including, bridges, tunnels and the construction of Sydney’s second airport at Badgerys Creek.
Commercial building activity (including offices, retail buildings and industrial premises) is poised to experience stronger conditions over the next two years. With more projects starting to receive the go ahead, the total value of commercial work is expected to recover from a 2.9% decline in 2017 to growth of 7.8% in 2018 and 5.8% in 2019.
The outlook also points to a continuation of strong growth in the multi-level apartments sector during 2018 (+14.8%) supported by projects either still underway or in the pipeline. However, the value of work is set to turn down sharply in 2019 (-16.6%).
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