Andrew Hanlan

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EXPERT OBSERVATION 
Business conditions and business confidence remained deeply negative in May - despite a bounce from the extreme lows of April, when the nation was in a partial lock-down (particularly for “non-essential” workers). 
That was a key finding from the NAB business survey conducted from May 19 to June 1. The previous survey was taken from April 23 to 30. 
Business conditions rose from -34 to -24 in the month. That is still below the low point in the GFC, of -16.5, but above the 1990s recession low of -39. 
This bounce in conditions occurred as restrictions started to ease and the economy slowly reopened, albeit a reopening that is uneven across sectors and across states. 
Business confidence, having collapsed to a never before seen low of -65 in March, has clawed its way back to be around “recession levels” in May, at -20. That compares to the lows in the past cycles of, -30 during the GFC and -23 in 1990. 
Clearly the situation remains fluid and fast moving. The continued easing of restrictions in June will see a further bounce in business conditions. 
Even so, the detail of this report - which was weak to very weak - highlights that a return to business as usual is still some way off. 
Forward orders were extremely weak for a third consecutive month, at -29, showing only limited improvement from the -35 recorded in April.
Considerable space capacity has emerged in the wake of this economic recession, with capacity utilisation at 74.5 in May. That is up from an extreme of 71.9 in April but compares to around 82 during the second half of 2019. 
Against this backdrop of excess capacity, continued sharp falls in new orders and an uncertain outlook the business sector is downbeat on hiring and investment the survey finds.
The detail around business conditions for May was: trading conditions rose from -31 to -18; profitability moved from -35 to -19; while employment showed very little improvement, edging up from -34 to -31. 
The capital expenditure index rose from -32.7 to a still very weak -21.6. The path of retail spending and business investment spending will be very different as the economy reopens and recovers from this recession. 
By state, NSW is outperforming, with business conditions lifting to -13 as the state reopens earlier than in some other jurisdictions. Across the other mainland states readings for May were: Victoria, -25; Qld, -27; SA, -33; and WA, -35. 
By industry, business conditions rebounded in retail, which has begun to reopen on an easing of social distancing measures.
Across other sectors, conditions are mixed, reflective of the staggered re-opening and the challenges created by the pandemic and the recession. Recreation &amp; personal was still deeply negative at -37 with many venues yet to re-open. The finance, business &amp; property industry group was also deeply negative, stalling at around -27. 
Andrew Hanlan is an economic analyst at Westpac
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Business conditions still deeply negative despite bounce: Andrew Hanlan

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In the month of March, the import bill declined by $0.5bn, down by 1.5%, to $34.4bn. Weakness in the month was driven by volatility in transport equipment (both capital and consumer) - stripping this out, imports rose by 0.7% in March.
The export detail remains volatile, with temporary supply disruptions a factor. In the month of March, metal ores slumped by $1.2bn, largely as anticipated, as iron ore shipments were delayed by Cyclone Veronica. Coal exports rose by $0.8bn, on a rebound in volumes, while gold fell back by $0.6bn, off a high base.
For the March quarter, the ABS advise that the trade surplus widened to $14.2bn from $8.6bn in Q4, an improvement of $5.6bn.
<a href="https://www.propertyobserver.com.au/images/2019/5/7/trade%201.jpg" target="_blank">Click here</a> to enlarge: 
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/5/7/trade%201.jpg" alt="">
Key to this development was higher commodity prices, which boosted export earnings. The terms of trade increased in the order of 3% in the quarter, we estimate.
Export earnings in Q1 rose by a little over 3.5%, while the import bill actually shrank, down by 1.4%.
Our preliminary calculations suggest that: export volumes expanded modestly in the quarter, up by almost 0.5%, with a sharp rebound in gold off a low base a key positive; and imports were soft in the quarter, contracting by almost 1.5%, against the backdrop of patchy domestic demand across the private sector.
<a href="https://www.propertyobserver.com.au/images/2019/5/7/trade%202.jpg" target="_blank">Click here </a>to enlarge: 
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/5/7/trade%202.jpg" alt="">
On these preliminary calculations, real net exports likely added to activity in Q1, potentially in the order of 0.3ppts to 0.4ppts. This is an upside surprise to our forecast of +0.1ppt – albeit largely driven by falling imports (a sign of domestic weakness) rather than by strength in exports.
Such an outcome represents a turnaround from the December quarter 2018, when net exports subtracted 0.2ppts from activity as export volumes declined by 0.7%, dented by the impact of the drought and temporary disruptions in the resources sector.
<a href="https://www.propertyobserver.com.au/images/2019/5/7/trade%203.jpg" target="_blank">Click here</a> to enlarge:
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/5/7/trade%203.jpg" alt="">
Key points:
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•In March, the trade surplus remained elevated at $4.9bn, only down a little from a record high of $5.1bn for February (revised up from $4.9bn).
•The March outcome exceeded expectations (market median $4.5bn and Westpac $4.2bn).
•Imports were the main surprise, falling by a further 1.5%, rather than rebounding by 1.0% as we anticipated.
•Exports fell but by somewhat more than anticipated, down by 1.8% v's a forecast -0.6%
•For the March quarter, the ABS advise that the trade surplus widened to $14.2bn from $8.6bn in Q4, an improvement of $5.6bn.
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Andrew Hanlan is senior economist for Westpac and can be contacted <a href="https://www.propertyobserver.com.au/https://au.linkedin.com/pub/andrew-hanlan/3/222/430" target="_blank">here</a>. 
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Australia's trade account, surplus elevated at a near record high: Andrew Hanlan

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In February, the trade surplus climbed to a record high of $4.8bn, up from $4.35bn in January, eclipsing the previous record of $4.6bn in December 2016. The February result exceeded expectations (market median $3.7bn and Westpac $3.8bn).
Imports surprised to the low side, declining by 1.1%, whereas we anticipate a rise of 1.1%. A drop in fuels was the source of weakness.
Exports provided an upside surprise, increasing by 0.2% vs a forecast decline of 0.9%. Notably, the expected pull-back in gold failed to materialise.
More fundamentally, a key dynamic driving a widening of the trade surplus is the boost to export earnings from higher commodity prices, notably for iron ore and coal.  Total exports in February are 13.2% above the level of a year ago, outstripping a 4.4% rise in imports.
<a href="https://www.propertyobserver.com.au/images/2019/4/3/TRADE%201.jpg" target="_blank">Click here </a>to enlarge: 
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/4/3/TRADE%201.jpg" alt="">
Metal ore exports (including iron ore) jumped in February, as anticipated, up by $1.0bn to $9.6bn - which is also a record high. Recall, the iron ore price leapt to US$85/t in the month as global supply was dented by the tailings dam disaster in Brazil. Iron ore is now trading close to US$90/t.
The trade surplus in the March quarter to date is running at $4.6bn a month, well up from $2.9bn per month in the December quarter. The bulk of this improvement likely reflects higher commodity prices.
The lift in commodity prices is boosting Australia's national income, which is flowing through to higher tax revenues - providing governments with additional fiscal flexibility, as evident in recent budget updates. However, despite this, wages growth remains sluggish.
<a href="https://www.propertyobserver.com.au/images/2019/4/3/TRADE%202.jpg" target="_blank">Click here</a> to enlarge: 
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In February, the import bill declined by 1.1% to $35.0bn. Key to the fall was a drop in fuels, down $344mn. Imports ex fuel were broadly flat in the month, inching 0.1% lower. Similarly, for the March quarter to date relative to the December quarter, fuels are tracking sharply lower - likely a mix of lower prices and lower volumes.
<a href="https://www.propertyobserver.com.au/images/2019/4/3/TRADE%203.jpg" target="_blank">Click here</a> to enlarge: 
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/4/3/TRADE%203.jpg" alt="">
Export earnings inched 0.2% higher in the month of February. As noted above, metal ores (including iron ore) jumped by $1.0bn to $9.6bn, a record high - driven by rising prices. Coal fell by $0.8bn on lower volumes. For the quarter to date, export earnings are up by around 4% on the December quarter - led higher by metal ores and gold, as well as rural goods, more than offsetting a softening for coal.
ANDREW HANLAN is a senior economist for Westpac
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Australia's trade account, surplus hits record high on higher iron ore price: Andrew Hanlan

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GUEST OBSERVER
Construction work, which is trending lower, stabilised in Q4, -0.2 percent, after a surprising sharp fall in Q3, -4.4 percent.
Construction work has been trending lower over recent years as mining investment falls back to more normal levels.
<a href="https://www.propertyobserver.com.au/images/2017/02/23/Screen%20Shot%202017-02-23%20at%208.14.29%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/02/23/Screen%20Shot%202017-02-23%20at%208.14.29%20AM.png" alt="">
Within that trend, the second half of 2016 was a volatile half year.  Q3 was particularly weak, -4.4 percent, in part due to bad weather. Q4 saw construction work stabilise at lower levels, -0.2 percent.
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The Q4 result was not greatly different to our expectations (Westpac f/c -0.8 percent and market median +0.5 percent).
The outcome does not alter our views on Q4 GDP, with our forecast at 0.4 percent/qtr, 1.5 percent/yr after a Q3 outcome of -0.5 percent/qtr, 1.8 percent/yr.
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By asset, key points are:
Private infrastructure activity fell further, -3.5 percent, with the mining investment downturn nearing its end. We had expected a sharper fall, -6 percent.  New home building activity advanced, +0.9 percent, consistent with strength in building approvals and a sizeable work pipeline. That follows a surprise 1.9 percent fall in Q3, constrained by bad weather.
<a href="https://www.propertyobserver.com.au/images/2017/02/23/Screen%20Shot%202017-02-23%20at%208.22.20%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/02/23/Screen%20Shot%202017-02-23%20at%208.22.20%20AM.png" alt="">
Renovation work rose 2.2 percent, more than reversing a 0.3 percent dip in Q3, consistent with rising approvals and positive fundamentals. 
Private commercial building rose 5.1 percent, after a sharp 10.8% fall in Q3, a decline that was overdue given earlier falls in approvals. More recently, approvals have lifted.
<a href="https://www.propertyobserver.com.au/images/2017/02/23/Screen%20Shot%202017-02-23%20at%208.23.36%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/02/23/Screen%20Shot%202017-02-23%20at%208.23.36%20AM.png" alt="">
Public works surprised to the low side, declining by 1.6 percent, whereas we had anticipated a rise of 1.6 percent. Public building work fell sharply, while public infrastructure activity consolidated in the quarter whereas a sizeable and rising work pipeline points to upside.
Andrew Hanlan is senior economist for Westpac and can be contacted <a href="https://www.linkedin.com/in/andrew-hanlan-4302223/" target="_blank">here</a>. 
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Andrew Hanlan

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