The low down on the slow down

Thu, 12 Jun 2014  |  

It is staggering the slowdown in the Australian economy that is unfolding before our eyes.

I was slow to realise this, but the recent run of news has now converted me to interest rates on hold with a renewed bias to cut and I am now bearish on the Australian dollar. Indeed, a couple of low inflation numbers, a faltering GDP growth rate through to the September quarter and a touch more downside on commodity prices will likely see the RBA cut interest rates.

So there.

Here is what I am now seeing. In the last month or two, some slightly disconcerting signs have emerged about the pace of economic growth with a number of key economic indicators stalling or indeed, reversing.

It was obvious that 2014 kicked off on a strong note, a point confirmed in the recent national accounts that confirmed annual GDP growth at an above trend 3.5 per cent. I judged this to be the start of a break higher in trend growth and that as a result the RBA would need to hike rates. Thankfully they didn't do that because it seems there is a real risk GDP growth will slow in the next little while.

Here is a list of some important (and not so important) indicators for the economy which suggest that growth may be faltering. They are generally monthly indicators (which can show turning points better than quarterly data) and the results are starting to scare me.

Retail sales have risen by an average of just 0.2 per cent in the three months since January after average monthly rises of 0.8 per cent in the prior six months. Retail sales, in real terms, will probably fall in the June quarter.

Building approvals for dwellings have fallen a thumping 14.7 per cent in the three months since January. In the seven months to January, building approvals had risen over 30 per cent. It is now likely that dwelling investment will be flat or negative in the June and September quarters.

Non-residential building approvals have fallen a mind numbing 54.3 per cent in the three months since January. This bodes very poorly for business investment over the next few quarters.

The number of housing finance approvals has fallen by a total of 0.8 per cent over the two months to April. This is not a large fall, but it could be starting to reverse the near 10 per cent rise in finance approvals over the 12 months prior.

House prices fell 1.9 per cent in May and so far in June are down a further 0.3 per cent. While there is nothing at all to be concerned about with these moves, they are hinting that some stalling in the rapid price gains that were seem over the prior couple of years may be coming to an end.

Consumer sentiment was smashed lower in the wake of the budget dropping some 15 per cent in the six months to May. The June 'rebound' of a puny 0.2 per cent suggests some weakness ahead for household consumption.

The number of ANZ job advertisements fell 5.6 per cent in May to largely unwind the 8.3 per cent gain in the prior four months. This feeds into the fact that employment fell 4,800 in May after a moderate 10.300 rise in April. This follows employment gains of 84,700 in the five months to March (average 16,900 per month).

The ASX has dropped 2 per cent since the mini-peak in April. While this is not a big move and it follows some stellar gains in the prior two years, like house prices, the faltering of the increases in share prices could be signaling a shift in momentum.

Commodity prices have fallen sharply, with iron ore dropping a hefty 25 per cent since the start of the year. According to the RBA index, commodity prices have fallen 9.8 per cent since January and will fall further when the June data are available. Commodity prices in AUD terms are at an 18 month low.

So there you have it.

Sure, some of these trends may be temporary, there could be noise in the data, or there may be unusual seasonal patterns or something else that will prove to be temporary. Let's hope so and the path to 3 per cent plus GDP is maintained.

But as I crunch the numbers taking account of the new news, it is getting harder to see that strong growth momentum in the first quarter of 2014 being sustained.

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