Housing investment growing slowest since early 2009: HSBC's Paul Bloxham
GUEST OBSERVER
The timely indicators of local economic activity have generally been improving in recent months. Business conditions and confidence have been on a rising trend. Jobs growth has been strong and forward-looking indicators suggest that hiring intentions have been improving. Mining investment has been trending lower, but growth is rebalancing towards housing and the services sectors. As non-mining sectors are more labour-intensive than mining, this is creating jobs, even if it is not a big support for business investment.
These local developments have helped to make the RBA more comfortable with its policy setting over the past month or so. The lower AUD is also now providing more support to Australia’s rebalancing act. The 15% fall in the AUD trade-weighted index over the past year means the local currency is now close to a level the RBA deems to be ‘fair value’.
However, offshore risks are brewing. Falls in China’s stock prices, adjustments to the RMB’s fixing mechanism and weaker Chinese indicators have seen increased market volatility as global investors become more concerned about China’s growth outlook. Commodity prices have fallen, with oil and copper prices declining to new six-year lows in recent weeks. Markets have also sold off on concerns about what a rise in the Federal Reserve’s policy rate before the end of the year could mean for emerging economy growth.
These global events are likely to be the focus of the RBA’s meeting next week. Importantly, though, the RBA’s recent statements have been flagging that an increase in market volatility was expected as the Fed got closer to lift-off. Weak commodity prices also do little to change the already weak outlook for new mining investment.
In next week’s statement we expect the RBA to note that it is too early to know the impact of recent market volatility on global growth. We expect the RBA’s cash rate to be held steady at 2.00% next week and the statement to contain little guidance about the likely future direction of policy.
Local economic indicators have been positive
Australia’s rebalancing act is running its course. A strong upswing in housing prices and residential construction is now combining with the next stage of the rebalancing act: an upswing in the services sectors. The clearest sign of the on-going rebalancing of growth is the upswing in jobs growth, which is being driven by employment in the household and business services sectors (Chart 1). As a result, the unemployment rate has stabilised at around 6-6.25% over the past year.
Surveys of business conditions also show that growth is shifting away from the mining to non-mining sectors (Chart 2). We expect the services sector to be the next driver of growth (see Australia’s next growth driver: The rise of the services sector, 10 July 2015). Recent falls in the AUD are helping to support the rebalancing act. Indeed, the 15% fall in the AUD trade-weighted index over the past year has brought the currency to a level that is making the RBA more comfortable (see Downunder Digest: Lower AUD is helping Australia's rebalancing act, 21 August 2015).
China’s economic indicators have weakened
Although local conditions have been improving, timely indicators suggest that China’s growth has continued to slow. The Caixin manufacturing PMI fell to its lowest level since 2009 in August (Chart 3).
Matching the weakness in manufacturing activity has been a further slowdown in investment in the manufacturing industry (Chart 4).
Although housing sales and prices have been lifting in recent months, this is yet to translate into a pick-up in housing investment, which is growing at its slowest pace since early 2009.
Growth is getting support from better conditions in non-manufacturing industries and continued solid growth in infrastructure investment, but growth in overall fixed asset investment has slowed.
Weaker growth indicators combined with recent falls in stock prices and changes in the way the People’s Bank of China manages China’s currency have all contributed to a marked increase in financial market volatility recently (discussed further below). China’s authorities have responded to recent concerns about weaker growth with further cuts to interest rates and the reserve requirement ratio. More investment in infrastructure is also expected to be a key support for growth. For more on HSBC’s view on China see HSBC China Economics and FX Strategy, 25 August 2015.
China and an expected Fed move are driving market volatility
Together, developments in China and concerns about the impact of a possible increase in the Federal Reserve’s policy rate, expected before the end of the year, have contributed to a significant increase in financial market volatility in recent weeks. Commodity prices have fallen particularly sharply, with copper and oil prices both falling to six-year lows (Chart 5). Iron ore prices have held up better, having fallen sharply earlier in the year.
Global equity markets have also seen sharp falls and a substantial increase in volatility. Western equity markets have been volatile, as investors assess the possible impact on global growth of weaker growth in emerging economies, which are under pressure from both falling commodity prices and an expected rise in US interest rates. Asia’s markets have been particularly volatile, as concerns about China’s growth and the Federal Reserve weigh on the region (Chart 6).
The RBA’s tactics and commentary
We expect the RBA’s meeting to be uneventful, with the central bank likely to remain comfortable that the economy is continuing to grow, that growth is creating sufficient jobs to keep the unemployment rate steady, and that the AUD is now at a level where it is helping to support the rebalancing of growth. The RBA is likely to acknowledge the recent increase in volatility in financial markets; however, the RBA is also to note that it is too early to determine the impact of these developments on the outlook for global growth.
We remain of the view that the most likely course for Australia’s monetary policy is that the cash rate remains at its current level in coming quarters. This is particularly the case as the AUD is now providing more support to local growth than previously. However, it does seem likely that the recent developments, particularly the fall in commodity prices, do increase the downside risks to Australia’s growth and, therefore, increase the possibilities that further monetary policy easing may be needed.
PAUL BLOXHAM IS CHIEF ECONOMIST (AUSTRALIA AND NEW ZEALAND) FOR HSBC.
