Commsec

<h2>EXPERT INSIGHT</h2>

The word &lsquo;boom&rsquo; is used cautiously, principally because booms never end quietly. In other words, booms tend to be followed by busts. The case in point was the boom of the late 1980s that preceded the recession of 1991.

On Friday the Reserve Bank lifted its economic growth forecasts. The Reserve Bank now expects growth of 5.25 per cent on average over the 2021 calendar year. The growth forecast for the 2021/22 year is now 5.00 per cent, up from the 3.75 per cent forecast made in February. And growth in calendar 2022 is now tipped at 4.00 per cent, up from 3.25 per cent.

The jobless rate is now seen at 5 per cent at the end of 2021 before hitting the &ldquo;full employment&rdquo; level of 4.5 per cent at the end of 2022.

But over the next 18 months, underlying inflation is not expected to hit 2 per cent (1.75 per cent in late 2022).

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Economic nirvana? Perhaps. But it is also important to remember that growth and unemployment have bettered even the most optimistic Reserve Bank forecasts over the past year.

So it&rsquo;s worth considering the latest &lsquo;upside&rsquo; targets from the Reserve Bank. On the Reserve Bank&rsquo;s most optimistic assumptions, annual economic growth would hit 10.25 per cent in June and 6 per cent in December (admittedly from a low base). The jobless rate would hit the &ldquo;full employment&rdquo; threshold late this year but inflation still wouldn&rsquo;t exceed 1.5 per cent.

The Reserve Bank won&rsquo;t consider lifting rates until inflation is sustainably within the 2-3 per cent target band. So conceivably unemployment could hit 4.5 per cent by end year with the cash rate still locked at a record low of 10 basis points.

Too good to be true?

It&rsquo;s important to remember that these forecasts are from the Reserve Bank, one of the most cautious and conservative central banks.

But there appears a growing appreciation for the fact that inflation &ndash; not just here but across the globe &ndash; has been low for a number of years. And a key reason for that is technology &ndash; consumers can buy goods whenever they want from wherever they want. Also, organisations like Airtasker, Uber and Menulog have boosted completion and kept downward pressure on prices. In addition, businesses in white collar industries can also get work done offshore &ndash; and this is largely unaffected by Covid-19. While wage growth &ndash; a key component of inflation &ndash; hit record low levels in Australia at the end of 2020 &ndash; with the pace of pay rises easing since the height of the mining construction boom.&nbsp;

But what happened in 1988?

Cash rates had been falling ahead of the October 1987 sharemarket crash. The cash rate was around 18.8 per cent in August 1986 and had fallen to 11.3 per cent in October 1987. Rates hit lows of 10.65 per cent in February 1988.

But after the sharemarket crash, the feared economic downturn didn&rsquo;t arrive. Investors instead switched affections from shares to property, underpinned by lower interest rates. According to CoreLogic, home prices rose by 2.8 per cent in October 1987, lifting the annual rate from 5 per cent to 9 per cent. By late 1988, home prices were running at a 30-32 per cent annual rate &ndash; far higher than we are witnessing today.

To quell the &lsquo;irrational exuberance&rsquo; in housing and general &lsquo;conspicuous consumption&rsquo;, the Reserve Bank lifted cash rates over 1988 and 1989, with rates hitting highs of 18.2 per cent in November 1989.

Under the pressure of high interest rates, the economy contracted in December quarter 1989 and September quarter 1990 ahead of the recession in the first half of 1991. Interest rates were progressively cut from 1990 and didn&rsquo;t stop falling until 1994.

What are the implications for investors?

No two periods are alike. The environment in 1988 was starkly different to current times. But in all times, investors need to be aware of the risks and opportunities.

The Covid-19 pandemic shocked economies across the globe in 2020 and the response to the pandemic has varied. Those shocks are still reverberating. Australia has done well in suppressing the virus, and all levels of government and the Reserve Bank acted quickly in supporting businesses and families.

As a result, the economic recovery has been strong, but it is important not to be complacent. Risks lie to the upside and downside. For instance an extended closure of foreign borders may make it difficult for firms to fill open positions. Further, the longer that foreign borders are closed, the greater the risk that demand for homes will reduce, affecting the home building sector. Policymakers must be agile in continuing to watch for the threats to the economic recovery.

But if Australia continues on its current course, strong economic growth will boost employment and give increased security to those in work. A tighter job market should bring higher wage growth. Businesses are well placed to embrace low interest rates to lift investment. Low rates and government grants are boosting home construction and the buoyant house building should continue over 2021.

Note that the Reserve Bank won&rsquo;t be lifting interest rates until wage growth is closer to 3 per cent. At present wages are &ldquo;expected to pick up to a little under 2 per cent over 2021, before gradually increasing to around 2&frac14; per cent by mid 2023.&rdquo; Even on the &ldquo;upside&rdquo; scenario, wage growth won&rsquo;t hit 3 per cent before 2024, tempering &ldquo;boom&rdquo; expectations.

But whether you call it a &lsquo;boom&rsquo;, economic nirvana or just a strong economic recovery, the economic outlook seems bright.

The current investment environment is positive for consumer discretionary, construction, construction materials and information technology sectors of the Australian sharemarket. Financials will benefit from the expectation of firmer borrowing, but super-low interest rates will cap margins and revenue.

Based on traditional valuations, the sharemarket may seem expensive on the current share price to earnings ratio (PE ratio) of 20.97 (the long-term average is 15.5). But valuations are more difficult to make in an environment of near-zero interest rates. Continued strong economic growth would serve to boost corporate earnings and justify current share prices.

The All Ordinaries index has hit record highs on numerous occasions over the past month. The benchmark ASX 200 is also expected to make new highs in coming weeks. The ASX 200 index is tipped to end the calendar year at 7,200 points.

The Reserve Bank has lifted its 2021 calendar year economic growth forecast from 4.00 per cent to 5.25 per cent

cjames

Is Australia headed for economic boom or economic nirvana?

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Expert Observer

<h2>National accounts</h2>

‘V-shaped’ recovery: The Australian economy (as measured by gross domestic product or GDP) grew by 3.1 per cent in the December quarter (consensus: +2.5 per cent) after rising 3.4 per cent in the September quarter and contracting 7 per cent in the June quarter. It was the biggest six-month lift in GDP since quarterly records began in 1959. GDP is still 1.1 per cent smaller than a year ago.

Annual result: In 2020, the economy contracted 2.5 per cent (biggest fall since 1947) after growing 1.9 per cent in 2019.

Contribution to growth: The biggest contributions to growth came from household spending (+2.3 percentage points); business equipment (+0.3pp); ownership transfer costs, dwellings, government consumption (all +0.2pp); and public investment (+0.1pp). But detracting from growth was net exports, commercial construction and inventories (all -0.1pp).

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Income: Real net national disposable income rose by 4.9 per cent in the December quarter and was up by 2.1 per cent on the year. In nominal terms GDP rose by 4.2 per cent in the quarter and rose by 0.6 per cent over the year.

Productivity: GDP per hours worked was flat in the December quarter but was up by 2.5 per cent on the year.

Industry sectors: Seventeen of the 19 industry sectors grew in the December quarter. The biggest contribution to the overall increase in output came from Agriculture, Forestry and Fishing (+0.5 percentage points) from Professional, Scientific and Technical Services and Administrative and Support Services (both +0.3pp). Output fell 1.0 per cent in Mining in the quarter with Electricity, Gas, Water and Waste Services down 0.9 per cent.

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<h2>What does it all mean?</h2>

It has been a most curious period for the Australian economy. After entering recession in the first half of 2020, the economy roared back in the final six months of the year. Clearly it has been all about Covid-19. Australian governments and the central bank responded quickly in locking down the economy and in providing the support and stimulus to families and businesses. The moves to suppress the virus were effective as were the support and stimulus measures.

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The ‘V-shaped’ nature of the recovery is everywhere to see – economic growth, the job market, retail spending and the housing market. The Reserve Bank acknowledges that the recovery has been stronger than expected.

But the job is not done. The economy is still around 1 per cent smaller than a year ago. Unemployment is still too high; inflation and wage growth are still too low. But the forward indicators like job ads and business and consumer surveys are positive.

We expect the economy to rebound 4.2 per cent in 2021 after contracting 2.5 per cent in 2020. Much still depends on Aussies doing the right thing with social distancing measures. The vaccine roll-out is in the infancy. And then there is the risk posed by mutant strains of the virus.

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Stimulus and support measures are still very much required, and any scale-back needs to be carefully managed. The Reserve Bank certainly hasn’t changed its rhetoric. Rates will remain low for another three years. Bond buying will continue. Cheap loans will remain under offer to business.  

The all-important jobless rate is expected to ease from 6.4 per cent currently to 5.7 per cent by the end of 2021. While still high, clearly it is moving in the right direction. But spare capacity will remain in the job market for a few more years, keeping the cash rate anchored at 0.1 per cent.  

Craig James is the chief economist at CommSec
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We expect the economy to rebound 4.2 per cent in 2021 after contracting 2.5 per cent in 2020

Joel Robinson

Biggest economic rebound on record: CommSec's Craig James

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The housing sector certainly seems to have finished off 2016 with a bang. Home prices surged by 1.4 per cent in December, according to CommSec's latest economic update report.
But it was more encouraging to see that the lift in home prices was more uniform across the capital cities, and even regional house prices recorded a healthy lift.
No doubt the improvement in economic conditions and low interest rates continues to fuel the interest in property.
Resource states noted a decent lift in prices over December.
And looking forward the lift in commodity prices may mean that the mining towns have come through the worst of the downturn.
Overall policymakers will keep a close eye on the housing sector the early part of 2017, and will prefer to see more balanced house price growth across the nation.
And in particular a further lift in regional house prices would be a positive outcome.
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Annual growth in home prices across regional centres is still just 2.8 per cent.
Global oil prices have risen steeply over the past couple of months, however motorists across some capital cities are still enjoying petrol at or below the cost price (terminal gate price).
In Sydney, Melbourne and Adelaide pump prices are around $1.21-$1.23 a litre – only 3-5 cents above wholesale prices.
Essentially motorists using fuel discount dockets will be buying petrol below cost.
The low petrol prices are not sustainable and prices in these capital cities are likely to lift markedly in coming days.
Interestingly in Brisbane and Canberra, prices are closer to a $1.30 a litre, while prices in Perth are closer to $1.40 a litre.
The production cuts announced by OPEC and non-OPEC nations were the first in 15 years and highlight the underlying concern about over-supplied oil markets.
The focus now shifts to see if oil producers comply with the stated production cuts.
The early indications are that producers are already notifying customers in Asia, Europe and the US of cuts to oil deliveries from January.
Importantly for motorists it means higher pump prices in the medium-term.
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The latest Australian manufacturing data is encouraging, suggesting that the current levels of interest rates and the Australian dollar are working in favour of domestic producers.
No doubt the sector is also benefitting from the stronger demand associated with the improved performance of the global economy.
The CoreLogic Home Value Index of capital city home prices surged by 1.4 per cent in December and was up 10.9 per cent over the year.
In regional Australia, house prices rose by 1.1 per cent in November and were just 2.8 per cent higher than a year ago. (Regional prices cover just houses and data is up to the end of November).
In capital cities, house prices rose by 1.4 per cent in December while apartment prices fell by 0.3 per cent.
House prices were up 11.6 per cent on a year ago and apartments were up by 5.9 per cent.
The average Australian capital city house price (median price based on settled sales over quarter) was $650,000 and the average unit price was $536,000.
Dwelling prices rose in five of the eight capital cities in December: Hobart (up 3.3 per cent), Melbourne (up 3.1 per cent), Perth (up 1.4 per cent), Sydney (up 0.9 per cent), and Brisbane (up 0.6 per cent). Prices fell in Adelaide (down 2.0 per cent), followed by Canberra (down 0.3 per cent) and Darwin (down 0.1 per cent).
Home prices were higher than a year ago in seven of the eight capital cities. Prices rose most in Sydney (up 15.5 per cent); followed by Melbourne (up 13.7 per cent), Hobart (up 11.2 per cent); Canberra (up 9.3 per cent); Adelaide (up 4.2 per cent), Brisbane (up 3.6 per cent) and Darwin (up 0.9 per cent). Prices fell in Perth (down by 4.3 per cent).
Total returns on capital city dwellings rose by 14.7 per cent in calendar year 2016 with houses up 15.3 per cent on a year earlier and units up 10.4 per cent.
The Performance of Manufacturing index rose by 1.2 points to 55.4 in December. A reading above 50.0 indicates that the sector is expanding.
AIG notes “Six of the seven activity sub-indexes in the Australian PMI® improved from November. Strong expansions in new orders (60.6 points) and sales (58.8 points) continued in December, while exports surged ahead (68.5 points), Production (58.2 points) also expanded more strongly while deliveries (52.4 points) continued to grow.
Employment (47.4 points) slipped in December, in line with recently weaker jobs growth. Five of the eight sub-sectors in the Australian PMI® expanded in December (three month moving averages).”
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“Comments from manufacturers in December indicate that demand (albeit somewhat mixed) appears to be improving again after a weak patch in the latter half of 2016.
The recovery in commodity prices has led to better conditions for manufacturers exposed to the mining sector, with some revival of mining investment and maintenance spending.
However, surging energy costs, weaker local demand and slower spending on particular major projects is depressing activity for some manufacturers.”
Today the national average wholesale (terminal gate) unleaded petrol price stands at a 14-month high of 118.4 cents a litre, up by 1.8 cents a litre over the week. The terminal gate diesel price stands at 115.1 cents a litre, up by 1.2 cents a litre over the previous week.
On Friday, the key Singapore gasoline price stood at a 16-month high of US$69.76 a barrel, up by US$1.66 or 2.4 per cent over the week.
In Australian dollar terms the Singapore gasoline price rose by $2.94 a barrel or 3.1 per cent to $96.82 a barrel or 60.89 cents a litre.
MotorMouth records the following retail prices for capital cities today: Sydney 121.2c; Melbourne 123.1c; Brisbane 129.8c; Adelaide 121.6c; Perth 138.9c; Canberra 127.7c; Darwin 129.3c; Hobart 128.7c.
Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum (AIP).
National average retail prices are calculated as the weighted average of each State/Territory's metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions.
AIP data for retail petrol prices is based on available market data supplied by MotorMouth.
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The CoreLogic Hedonic Australian Home Value Index is based on Australia’s biggest property database. Unlike the ABS Index, which excludes terraces, semi-detached homes and apartments, the CoreLogic Hedonic Index includes all properties. Home prices are an important driver of wealth and spending.
The Australian Industry Group compiles the Performance of Manufacturing Index (PMI) each month. The Australian PMI is the Australian equivalent of the US ISM manufacturing gauge.
The PMI is one of the timeliest economic indicators released in Australia. The PMI is useful not just in showing how the manufacturing sector is performing but in providing some sense about where it is heading.
The key ‘forward looking’ components are orders and employment.
Petrol prices are headed higher. And given that petrol is the single biggest weekly purchase that most families make, higher pump prices may serve to restrain growth in spending.
If home prices lift too quickly policymakers will once again raise concerns about the need for a further tightening in lending standards.
Savanth Sebastian is a senior economist for CommSec.
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jchancellor-FAypfDUnLy

Major city home prices soar and mining towns get through the worst: Savanth Sebastian

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GUEST OBSERVER
Consumer confidence: The ANZ/Roy Morgan consumer confidence rating rose by 4.4 percent to 120.6 in the week to September 25.
It was the biggest weekly gain in 11 months and the confidence reading is well above the average of 112.6 since 2014.
Finances healthy: The estimate of family finances compared with a year ago has hit the highest levels in seven years.
What does it all mean?
Just like other financial commentators and analysts, the Reserve Bank takes an interest in the regular readings of consumer confidence. Roy Morgan and ANZ compile a weekly index and the Melbourne Institute and Westpac produce a monthly confidence measure.
But from the Reserve Bank’s point of view, the questions posed on family finances are the most revealing. Clearly if consumers believe that their finances are in good shape, and are expected to stay that way, then they are far more likely to spend.
So it is important that the latest survey shows the current state of family finances at the best levels in seven years. Or expressed another way, finances are the best since the global financial crisis. Expectations of another rate cut have been receding and the latest consumer confidence readings will reinforce that trend.
The consumer survey is clearly great news for any business dependent on consumer spending, especially the more discretionary or non-essential purchases.
What do figures show?
Consumer confidence 
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The ANZ/Roy Morgan consumer confidence rating rose by 4.4 percent (5.1 points) to 120.6 in the week to September 25. Confidence is up 9 percent over the year and well above the average of 112.6 since 2014. All five components of the index rose in the latest week:
<ul>
<li>The estimate of family finances compared with a year ago was up from +10 to +16; 
</li>
<li>The estimate of family finances over the next year was up from +25 to +30; 
</li>
<li>Economic conditions over the next 12 months was up from +1 to +6; 
</li>
<li>Economic conditions over the next 5 years was up from +9 to +12; 
</li>
<li>The measure of whether it was a good time to buy a major household item was up from +33 points to +39 points.</li>
</ul>
What is the importance of the economic data?
The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.
What are the implications for interest rates and investors?
Consumer confidence is clearly healthy and is supporting a lift in spending - a result that was largely confirmed in the August Commonwealth Bank Business Sales Index, a gauge of economy-wide spending.
More confident consumers are more likely to spend – although there are no guarantees.
While we haven’t yet ruled out a November rate cut, much will depend on the inflation readings released in late October.
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Craig James is the chief economist at <a href="https://www.comsec.com.au/default.aspx" target="_blank">CommSec</a>.
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Aussie finances in best shape for 7 years: CommSec's Craig James

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EXPERT OBSERVER

The Reserve Bank (RBA) has left the target rates for both the cash rate and 3-year government bond yield at 0.10 per cent. The RBA will purchase an additional $100 billion of bonds issued by the Australian Government and states and territories when the current bond purchase program is completed in mid-April. 
 

<h2>What has changed since the last RBA Board meeting on December 1?</h2>

• Joe Biden was sworn in as the 46th US President.

• ANZ job advertisements rose by 2.3 per cent in January to 161,582 available positions. Ads have lifted for eight successive months to be up 5.3 per cent from a year ago.

• Employment rose by 50,000 in December after increasing by 90,000 jobs in November. Full-time jobs rose by 35,700 and part-time jobs rose by 14,300. The unemployment rate fell from 6.8 per cent to 6.6 per cent in December.

• Preliminary retail trade fell 4.2 per cent in December (9.4 per cent annual) after rising 7.1 per cent in November.

• The weekly ANZ-Roy Morgan consumer confidence rating rose to a 15-month high.

• The NAB business confidence index fell from a 31-month high of +12.7 points to +4.5 points in December. But the business conditions index lifted from +7.0 points to 28-month highs of +14.2 points.

• The International Monetary Fund expects the global economy to expand by 5.5 per cent in 2021, which is 0.3 percentage points higher than the October 2020 forecast.

• The Consumer Price Index rose by 0.9 per cent in the December quarter to be up by 0.9 per cent on the year. The trimmed mean (underlying) measure rose 0.4 per cent in the quarter to be up 1.2 per cent on the year.

• Private sector credit (effectively outstanding loans) rose by 0.3 per cent in December to be up 1.8 per cent over the year.

• In the full twelve months to December the underlying Commonwealth Government cash balance was $186,120 million (9.5 per cent of GDP). The budget deficit for the six months to December was $9.5 billion lower than the ‘profile’ deficit.

• A retail trading frenzy for highly shorted stocks led to volatility on global sharemarkets and spilled over into the silver market.

• The Aussie dollar has lifted from US73-74 cents to US75-77 cents.

<h2>The Assessment</h2>

The Reserve Bank Board is not expecting to increase the cash rate until 2024 “at the earliest”. The first Tuesday in the month will never be the same.

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<h2>Perspectives on interest rates</h2>

The Reserve Bank left the cash rate at 0.10 per cent after cutting the rate from 0.25 per cent on November 3. The RBA previously cut the cash rate on March 3 and March 19, 2020, each by 25 basis points. The target rate for 3-year bond yields was left at 0.10 per cent.

On November 3 the RBA cut the 3-year bond target from 0.25 per cent to 0.10 per cent. The RBA implemented the 0.25 per cent target rate for 3-year bond yields on March 19, 2020. There have been 18 cash rate cuts since November 2011 with the cash rate cut from 4.75 per cent. Previously cash rates rose seven times from October 2009 to November 2010 from 3.00 per cent to 4.75 per cent.

<h2>What are the implications of RBA's decision?</h2>

• The Reserve Bank used the word, “strong”, five times in the statement. The economic recovery, employment and retail spending were all described as “strong”.

• The Reserve Bank Governor will go into more depth about the economic recovery in a speech tomorrow. Further, Governor Lowe gives testimony to the House of Representatives Economics Committee on Friday. On the same day the RBA issues the quarterly Statement on Monetary Policy that includes the latest forecasts. We received some inkling of the forecasts today: “In underlying terms, inflation is expected to be 11⁄4 per cent over 2021 and 11⁄2 per cent over 2022.”; “the central scenario is for unemployment to be around 6 per cent at the end of this year and 51⁄2 per cent at the end of 2022.”; the central scenario being for GDP to grow by 31⁄2 per cent over both 2021 and 2022.

• The Reserve Bank Board’s central scenario requires significant job gains and a return to a tight labour market to stoke inflation. And that is not expected until 2024 at the earliest.
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The RBA has left the target rates for both the cash rate and 3-year government bond yield at 0.10 per cent, with an increase not expected until 2024 "at the earliest"

max.kwok_55688

RBA interest rates - Set the watch for 2024: CommSec's Craig James

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EXPERT OBSERVATION
Housing finance (March)
The number of loans (commitments) by home owners (owner-occupiers) fell by 2.2 per cent in March – the sixth fall in seven months. Loans are down by 3.5 per cent on the year.
The value of new housing commitments (owner occupier and investment) fell by 4.4 per cent in March from six-month highs.
In trend terms the value of loans to budding home owners hit a record high of $21.23 billion in March. Victorian and Tasmanian loans are at record highs.
The proportion of first-time buyers in the home loan market fell from 17.9 per cent to a six-month low of 17.4 per cent (decade-average 17.8 per cent)
The home loan data have implications for builders, housing-reliant businesses, finance providers, retailers, and companies dependent on consumer and business spending.
What does it all mean?
On average, around $21 billion in new home loans are made to budding home owners every month. The figure bobs around from month to month. But overall, there is still healthy interest by Aussies in buying or building their dream home. And that is shown by the trend value of home loans hitting record highs.
In trend terms investment loans are down almost 11 per cent on a year ago with loans to budding owners up almost 5 per cent. There has been a distinct shift in the home loan market. Clearly investors are re-doing sums. The prospect of strong price appreciation for investment properties has moderated in many parts of the country. And then there is the question of getting or retaining tenants.
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Housing market activity has become more sustainable with a fundamental re-assessment occurring on future prospects. Fewer loans are being made to fund new builds. And that means that new home starts will ease in coming months. Work will be harder to get. And building operators may switch interest to commercial and engineering prospects.
What do the figures show
Housing finance – number (March)
The number of loans (commitments) by home owners (owner-occupiers) fell by 2.2 per cent in March – the sixth fall in seven months. Loans are down by 3.5 per cent on the year.
Excluding refinancing of dwellings, the number of loans fell by 1.7 per cent.
Loans by owner-occupiers for the construction of homes decreased by 4.4 per cent – the sixth decline in eight months.
Loans to buy newly-erected dwellings fell by 1.4 per cent after lifting by 6.3 per cent in February.
Loans for the purchase of established dwellings (excluding refinancing) fell by 1.1 per cent – the third fall in four months.
The number of refinancing transactions fell by 3.2 per cent – the third straight fall.
Changes in home loans across the country: NSW (down 2.9 per cent); Victoria (down 1.5 per cent); Queensland (down 0.3 per cent); South Australia (down 8.6 per cent); Western Australia (down 2.3 per cent); Tasmania (up 1.9 per cent); Northern Territory (down 10.4 per cent); ACT (up 2.6 per cent).
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Housing finance – value (March)
The value of new housing commitments (owner occupier and investment) fell by 4.4 per cent in March from six-month highs.
Owner-occupier loans fell by 1.9 per cent and investment loans slumped by 9.0 per cent.
The value of loans by owner-occupiers and investors to build new homes decreased by 10.4 per cent in March to a 15-month low of $2.84 billion.
Housing finance – other statistics
The value of cancelled loans totalled $1.3 billion in March, down from $1.4 billion a year earlier.
Commitments actually advanced (loans made) totalled $19.1 billion, down from $19.3 billion a year earlier.
The proportion of first-time buyers in the home loan market fell from17.9 per cent to a six-month low of 17.4 per cent (decade-average 17.8 per cent).
The proportion of fixed rate loans fell from 14.4 per cent to a 12-month low of 14.2 per cent.
And the average home loan across Australia stood at $388,100, up by 5.4 per cent on the year.
What is the importance of the economic data?
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Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market. 
What are the implications for interest rates and investors?
Investors have adopted a cooler stance on housing. More stock has come on the market, reducing the prospect of out-sized capital gains in the short term. But budding owners are still active. Population continues to rise and more people are finding jobs.
Click here <a href="https://www.propertyobserver.com.au/images/2018/5/11/investment-cools.jpg" target="_blank">to enlarge.</a>
<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/2018/5/11/investment-cools.jpg" alt="">
Builders and real estate agents will need to work harder for business in many parts of the country. Clearly conditions are tough in the Northern Territory. But Victoria and Tasmania remain strong.
CommSec expects interest rates to remain stable until at least November. In fact the first rate hike may now occur in February next year.
Craig James is the chief economist at <a href="https://www.comsec.com.au/default.aspx" target="_blank">CommSec</a>.
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cjames-5S2v74qSNK

Record home loans, but investor demand cools: CommSec

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EXPERT OBSERVER
Engineering construction work done rose by 2.2 per cent in the June quarter, down by 5.2 per cent from a year ago. A month ago, it was estimated that engineering construction was up by 0.4 per cent in the quarter, but down 7.2 per cent over the year. 
Infrastructure boom: Engineering work done for the public sector rose by 2.7 per cent in the June quarter. Over the year to June, a record $37.4 billion of work was done for the public sector. 
Work yet to be done: Excluding resources, engineering work yet to be done stands at $43.1 billion, below record highs. But outstanding road and railway work were both just below record highs. And electricity generation, transmission and distribution work was at five-year highs. The data on engineering construction work is important for builders, building material companies, professional services, developers, government businesses and other dependent sectors and industries.
<img src="https://www.urban.com.au/images/2018/9/26/CommSec%201.JPG" alt="">
What does it all mean? 
The infrastructure boom continues on Australia’s eastern seaboard. Strong population growth and government spending are supporting a gargantuan pipeline of building activity in Victoria, New South Wales and Queensland. 
In fact, construction work done in Victoria is at record highs, the highest in New South Wales in five years and at the strongest level since December 2015 in Queensland. While activity is largely concentrated on public transportrelated rail, road and airport projects, work done on much-needed electricity generation, transmission and distribution infrastructure is at five-year highs. 
And it appears that the surge in construction activity and public transport-related infrastructure spending are generating price pressures. Over the year to June, construction costs were up 3.3 per cent - just below nine-year highs. And engineering costs rose by 4.2 per cent - a seven-year high. 
Quantity surveyor WT Partnership’s recently released Australian Construction Market Conditions report says that infrastructure tender price growth will increase by up to seven per cent next year. Big-ticket projects, such as Badgerys Creek Airport in Western Sydney and the Melbourne Metro Rail Tunnel, will boost demand for building materials, plant, equipment and scarce labour – especially engineers, project managers and construction trades.
Wage pressures are building in the construction sector.
In fact, skilled vacancies for construction managers are around the highest level in seven years.
What do the figures show? 
Engineering construction work done rose by 2.2 per cent in real (inflation-adjusted) terms in the June quarter – the fifth gain in six quarters. But work done is down 5.2 per cent on a year ago. Previously, engineering work was reported as rising by 0.4 per cent in the June quarter to be down 7.2 per cent over the year. 
Value of work completed for the public sector rose by 2.7 per cent in the quarter while private sector activity rose by 1.8 per cent. 
Over the year to June a record $37.4 billion of infrastructure work was completed (engineering work for the public sector.)
<img src="https://www.urban.com.au/images/2018/9/26/CommSec%203.JPG" alt="">
 
Construction work rose in four of the states and territories in the June quarter: NSW (up 3.3 per cent); Victoria (down 4.7 per cent); Queensland (up 3.4 per cent); South Australia (up 9.6 per cent); Western Australia (up 2.7 per cent); Tasmania (down 1.0 per cent); Northern Territory (down 16.2 per cent); ACT (down 16.5 per cent). 
Work yet to be done: There was $64.4 billion of engineering work yet to be done as at June 2018, up from $59.8 billion in the previous quarter. Excluding the resource sector (coal, oil, pipelines etc.) work to be done stands at $43.1 billion, below the record high of $45.3 billion in March 2012. 
As at June 2018, $18.3 billion of work was to be completed on roads and highways and $11.7 billion on railways. And work to be completed on electricity generation, transmission and distribution was the highest in five years at $6.8 billion. 
<img src="https://www.urban.com.au/images/2018/9/26/CommSec%202.JPG" alt="">
In original terms, engineering work commenced in the June quarter was $29.0 billion, down by 2.0 per cent in the quarter. Almost $90.1 billion of engineering work was started in the past year. What is the importance of the economic data? 
The Bureau of Statistics releases quarterly estimates of Engineering construction activity. The estimates include value of engineering construction work done, commenced and yet to be done, classified by state or territory, commodity (roads, bridges, pipelines etc.), sector (public/private) undertaking the work, and sector for whom the work is being done. The data is a comprehensive assessment of the infrastructure pipeline. What are the implications for interest rates and investors? 
According to surveyor Rider, Levett and Bucknall, a record 735 cranes were hoisted above our major cities in the September quarter, reflecting the continuing strength of the construction sector within the Australian economy. Around 321 cranes are located in Sydney, followed by 192 in Melbourne and 112 in South-East Queensland.
Construction companies such as Lend Lease, Thiess, Brookfield Multiplex, BGC and Leighton have cranes and advertising scattered all over our major cities. They have plenty of work and are hoovering up highly skilled engineers, project managers and construction workers. 
<img src="https://www.urban.com.au/images/2018/9/26/CommSec%204.JPG" alt="">
Demand for labour and materials in infrastructure and construction-related sectors will increase over the coming year, pressuring contractors and sub-contractors. 
According to WT Partnership, tender prices will grow by 3- 7 per cent in New South Wales, Victoria, South-East Queensland, Tasmania, South Australia and the ACT in 2018-2019. 
Major projects under construction include the Sydney and Melbourne Metros. And projects that will enter the pipeline include the East Coast Inland rail line, Melbourne Airport rail, Brisbane Cross River Rail and Badgerys Creek rail. 
CommSec expects official interest rates to remain stable until late 2019.
Ryan Felsman is a Senior Economist for CommSec
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j.ballantyne1990-6AQqhLzZaK

Record annual infrastructure building: Ryan Felsman

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The number of loans (commitments) by home owners (owner-occupiers) fell by 2.1 per cent in August. Loans are down by 10.2 per cent on the year – the biggest fall in 7½ years.
Owner-occupier loans fell by 2.7 per cent – the biggest fall in 2½ years - and investment loans fell by 1.1 per cent, a sixth successive decline. 
The average credit card balance fell by $5.90 to $3,217.82 in August, down from $3,223.73 in July and $3,278.35 in June. 
China’s international trade surplus rose by US$3.8 billion to US$31.69 billion (forecast: US$19.40 billion) in September. Over the year to September, exports rose by 14.5 per cent (forecast: +8.9 per cent) and imports increased by 14.3 per cent (forecast: +15.0 per cent). China’s imports from Australia rose by 2.9 per cent to US$8.8 billion.
Credit card data is important for the retail and financial sectors. The home lending figures have implications for builders, housing-reliant businesses, finance providers, retailers, and companies dependent on consumer and business spending. 
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What does it all mean?
In its semi-annual update on the health of the Australian economy, the Reserve Bank said that a slowdown in Australia’s housing market is a “positive development for financial stability”. So policymakers will be pleased with developments so far, with home prices ‘normalising’ in Sydney and Melbourne and demand for loans from indebted home owners falling to 7½-year lows.
Overall, tighter lending conditions, increasing mortgage rates and falling home prices are impacting housing demand, inventory levels and home building. And loans for the construction of new homes plunged in August, confirming the recent declines in building approvals. But pockets of strength remain. Annual home prices are still up in Hobart, Canberra, Brisbane and Adelaide. In fact, home lending in Canberra increased during August.
While credit conditions have tightened, the Reserve Bank has refuted suggestions of a ‘credit crunch’ noting “only the risky borrowers have actually been constrained by the tightening in lending standards, as most borrowers take out loans well below the maximum that are offered by lenders”. And the average home loan size across Australia - at $395,800 - is just below record highs of $400,100 in May, implying that Aussies are still taking out significant loans. But househoulds appear more cautious about credit card debt with balances falling for successive months. 
What do the figures show?
Housing finance – number
The number of loans (commitments) by home owners (owner-occupiers) fell by 2.1 per cent in August. Loans are down by 10.2 per cent on the year – the biggest fall in 7½ years (November 2010). 
Excluding refinancing of dwellings, the number of loans fell by 2.9 per cent – the largest fall in eight months.
Loans by owner-occupiers for the construction of homes fell by 6.2 per cent – the biggest fall in six months.
Loans to buy newly-erected dwellings rose by 0.3 per cent, the first increase in six months.
Loans for the purchase of established dwellings (excluding refinancing) fell by 2.5 per cent – the largest fall in eight months.
The number of refinancing transactions fell by 0.6 per cent.
Changes in home loans across the country: NSW (down 1.0 per cent); Victoria (down 3.0 per cent); Queensland (down 4.8 per cent); South Australia (up 1.9 per cent); Western Australia (down 0.3 per cent); Tasmania (down 2.2 per cent); Northern Territory (down 10.6 per cent); ACT (up 2.7 per cent).
Housing finance – value
The value of new housing commitments (owner occupier and investment) fell by 2.1 per cent in August.
Owner-occupier loans fell by 2.7 per cent – the biggest fall in 2½ years - and investment loans fell by 1.1 per cent, a sixth successive decline. Over the year to August, owner-occupier loans declined by 3.9 per cent - the steepest decline in 21 months – while investor loans have declined by 20.5 per cent, the largest decline in over two years. 
The value of loans by owner-occupiers and investors to build new homes fell by 7.9 per cent in August to $2.82 billion to be down 11.8 per cent on the year – the largest annual decline in six years. 
Housing finance – other statistics
The value of cancelled loans totalled $1.408 billion in August, up from $1.365 billion a year earlier.
Commitments actually advanced (loans made) totalled $20.6 billion, up by 1.0 per cent on a year earlier.
The proportion of first-time buyers in the home loan market eased from 18.0 per cent in July to 17.8 per cent in August (decade-average 17.8 per cent) – just below six-year highs. 
The proportion of fixed rate loans rose from 11.8 per cent in July to 12.3 per cent in August.
And the average home loan across Australia fell from $396,100 in July to $395,800 in August to be up 7.1 per cent on the year.
Credit &amp; debit card lending:
The average credit card balance fell by $5.90 to $3,217.82 in August, down from $3,223.73 in July and $3,278.35 in June.
Of credit cards attracting interest charges, the average outstanding balance fell by $25.96 in August to $2,008.62.
The average credit card limit rose by $14.38 to $9,496.10 in August.
Usage of credit card limits stood at 34.0 per cent in July.
The number of credit card accounts stood at 16.013 million in August.
The number of debit card accounts stood at 37.262 million in August.
The number of ATM transactions in August was down by 1.2 per cent over the year. Transactions have been consistently falling in annual terms for over six years.
The number of debit card purchases in August were 15.2 per cent higher than a year ago with the value up by 11.5 per cent.
In August 15.2 transactions per account were made on credit cards (on average) with 15.2 transactions per account also made on debit cards.
<h1>What is the importance of the economic data?</h1>
The Reserve Bank releases data on credit and debit card transactions each month. The credit card figures are useful in highlighting consumer borrowing and spending trends.
Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.
<h1>What are the implications for interest rates and investors?</h1>
The rebalancing in the housing market continues. Home prices are rising in some cities and towns, but falling in others. Housing credit growth continues to slow as demand for finance by both both investors and owner-occupiers’ declines. Lending standards are being tightened amid firmer regulatory oversight.
And the major banks have begun lifting mortgage rates, following a sustained increase in funding costs as rising official interest rates overseas increase the cost of borrowing in global financial markets.
The Reserve Bank continues to closely monitor the Aussie housing market and the debt levels of households. We expect a continued orderly slowdown with a soft landing still expected in Sydney and Melbourne. But there are risks that a sharper-than-anticipated downturn could adversely impact home borrowers’ equity, weighing on household confidence and spending.
CommSec doesn’t expect a change in interest rates until at least November 2019.
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Ryan Felsman is a Senior Economist for CommSec
 
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jrobinson-rf4aSBido9

Home lending approvals hit seven year low: CommSec

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EXPERT OBSERVATION
The 2019/20 financial year is almost complete and it is an opportune time to see how investments, financial markets and economies have performed over the past year.
Not to put too fine a point on it, the past year has been difficult.
The US-China trade stoush and Brexit dominated in the first half of 2019/20, causing businesses and consumers to restrain spending, employment and investment.
And, just when there were signs of hope that these two factors would be less depressing for the global economy, the coronavirus emerged.
It is now acknowledged that COVID-19 poses the biggest threat to the global economy in 90 years.
Central banks have slashed interest rates and governments have provided unprecedented amount of fiscal support and stimulus for their economies.
Governments started to impose lockdown measures on businesses and the movement of people from late January with the strictest measures applied from March to May. Countries have had varying success in suppressing the virus, but the financial year is ending with countries coming out of lockdown and returning their economies to some sense of normalcy.
Over 2019/20 there have been four interest rate cuts, each of 25 basis points.
The cuts occurred on July 3, October 2, March 4 and March 20.
The cash rate now stands at a record low of 0.25 per cent or 25 basis points.
The rate cuts in July and October, 2019 were made with the intention of speeding up the economy and driving unemployment lower.
The rate cuts in March 2020 were designed to shore up the economy against the depressing economic effects of COVID-19.
On March 20, the Reserve Bank also set a target for the 3-year government bond yield at 25 basis points.
The Reserve Bank also implemented a term funding facility designed to provide financial assistance for small and medium sized businesses.
The Aussie dollar began the financial year near US70 cents and is ending the year near US69 cents. But those values mask some volatility, especially in 2020.
The high for the Aussie was US70.82 cents on July 19.
The low (actually a 17-year low) was set on March 19 at US55.06 cents.
The low point largely corresponded to lows for global sharemarkets and marked the peak of the virus panic – the fears about the spread of the virus and the implications for economies.
It has been the most volatile year for the currency in five years.
Over 2019/20 we have calculated that the Aussie is the 70th strongest currency against the US dollar of 120 currencies tracked (down 1.7 per cent).
The currencies of Netherlands Antilles, Taiwan, Afghanistan and Malawi all rose 4.0-5.5 per cent.
The weakest currencies were from the economies of Argentina, Brazil, Zambia, the Seychelles and South Africa. Only 19 currencies of 120 currencies have lifted against the greenback over the year.
In the first six months of 2020, the Aussie dollar has also fallen 1.6 per cent against the US dollar, making it the 73rd strongest of 120 currencies tracked.
The currencies of Japan, Switzerland and Taiwan have lifted by around 1-2 per cent.
The weakest currencies are from the economies of Brazil, Zambia, the Seychelles and South Africa.
Only 13 currencies have lifted against the greenback so far this year.
Commodity prices eased over the second half of 2019/20 as COVID-19 fears dominated.
The Commodity Research Bureau futures index fell by 24 per cent over 2019/20, but the CommSec daily index eased by only 13 per cent.
The difference between the two indexes is gold, with its price up 26 per cent over 2019/20 while beef has risen by 7 per cent and sugar is down by only 4 per cent.
Amongst base metal prices, nickel has lifted by almost 1 per cent and copper is down 1.5 per cent.
Oil has fallen 31 per cent, while spot natural gas has slid 54 per cent and iron ore is down by 13 per cent.
The Australian sharemarket started 2019/20 with the All Ordinaries near 6,700 points and the ASX 200 near 6,620 points.
The All Ords is ending the year near 6,060 points (down 9.4 per cent) with the ASX 200 near 5,950 points (down 10.0 per cent).
 If we focus on the ASX 200, the index hit record highs of 7,162.5 on February 20 with lows hit around a month later on March 23 at 4,546 points.
We have estimated that Australia (-9.4 per cent) is the 39th strongest of 72 global bourses so far in 2019/20.
Interestingly only 15 of the 72 bourses have recorded gains over the year.
The best performers were hyperinflation-affected Zimbabwe and Venezuela but Denmark is up 26 per cent.
Notably the US Dow Jones fell by 3 per cent while the NASDAQ has lifted 24 per cent. New Zealand has risen by 12.4 per cent and has been the 5th strongest bourse.
The worst performers include Cyprus, Lebanon, Kenya, Colombia and Greece.
In the first six months of 2020, the All Ordinaries has fallen by almost 11 per cent, ranking Australia 31st of 72 nations.
Only 8 of 72 bourses are up so far this year.
Again Denmark and New Zealand are amongst the out-performers with Cyprus, Greece, Austria, Colombia and Kenya amongst the laggards.
Total returns on Australian shares have fallen by 6.4 per cent over 2019/20 which, if maintained, would be the first decline in returns in eight years.
Returns on dwellings have lifted by 12.3 per cent while returns on government bonds have lifted by 4.3 per cent.
Of the 22 identified industry sub-sectors, only eight have recorded gains in 2019/20.
Leading the gains is Consumer durables &amp; apparel (up by 45.9 per cent) followed by Pharmaceutical &amp; Biotech (up 32.3 per cent), Software &amp; services (up 19.9 per cent) and Retailing (up 15.2 per cent).
At the other end of the scale, Energy has fallen the most (down 29.2 per cent) from Banks (down 27.9 per cent) and Insurance (down 23.9 per cent).
Of the size categories, the MidCap50 has out-performed (down 2.1 per cent) from the Small Ordinaries (down 5.4 per cent), the ASX100 (down 10.6 per cent) and the ASX50 (down 12 per cent).
Now it’s all about COVID-19.
The economic outlook depends on the success or otherwise achieved by governments, health authorities and communities in suppressing the spread of the virus.
If the virus is contained and the active case load remains manageable, then more parts of the economy can re-open and a degree of normality can return to society and the economy.
As economies re-open, setbacks can be expected in suppressing the spread of COVID-19. There is no road map to follow, governments will need to quickly respond to changes in circumstances.
Ideally, a vaccine or treatment will be found.
But economies can still rebound from lockdown-driven lows in the absence of a vaccine. If and when a vaccine is found, it will still take time for testing and commercialisation.
The main short-term implication of finding a vaccine is a boost to confidence, encouraging businesses to invest and hire workers and encouraging consumers to spend.
Prospects for sharemarkets will depend on businesses returning to normal and people returning to their workplaces.
CommBank Group economists tip a 3.2 per cent fall in the global economy in 2020 and then a 4.7 per cent lift in 2021.
In Australia, the economy is tipped to fall 3.9 per cent in 2020 before recovering 3.0 per cent in 2021.
The recovery in Australia will be restrained by the drying up of external migration, affecting tourism, education and real estate markets.
We assume that Australian governments and the Reserve Bank will live up to the promise of doing “whatever it takes” to restore the economy to full health – especially restoring health to the job market. This means leaving the cash rate at record lows and continuing to provide fiscal support measures.
Governments will need to balance health risks with economic risks.
But we expect the Federal Government to live up to the mantra of protecting jobs. There are still a few weeks until the July 23 Budget update where the Government will assess whether to extend JobKeeper in some form.
We expect the unemployment rate to peak near 8.4 per cent in the September quarter before easing toward 7 per cent by December quarter 2021.
The good news for the government is that the Budget was balanced before the virus crisis hit.
That has allowed the Federal – as well as State and Territory governments – to provide all the necessary support for economies. We estimate that around $295 billion of fiscal and financial support (almost 15 per cent of GDP) has been provided by all governments and the Reserve Bank.
Budget deficits near $130 billion are expected in 2019/20 and 2021/21 (around 7 per cent of GDP). Net debt may lift from around 20 per cent of GDP to around 30-35 per cent of GDP – still low compared with other advanced nations.
The cash rate is expected to remain at 0.25 per cent until 2022.
In terms of the sharemarket, last year we noted: “Over the coming year CommSec expects the All Ordinaries index to be near 6,700-7,000 points in December 2019 and 6,800-7,100 points in June 2020.” The first forecast was achieved. Clearly COVID-19 has ensured that the June 2020 forecast won’t be achieved.
Over the coming year CommSec expects the All Ordinaries index to be near 6,100-6,400 points in December 2020 and 6,500-6,800 points in June 2020.”
The Aussie dollar is expected to trend higher over the coming year in line with expectations of economic recovery at home and abroad.
CommBank currency strategists are tipping the Aussie dollar to lift to US72 cents by December 2020 and US76 cents by June 2021.
But the strategists warn “The increasingly fraught relations between US China and Australia China will be an intermittent downside risk to AUD/USD. Some of these tensions reflect ‘great power’ rivalry between the US and China that will not go away soon.”
Craig James is the Chief Economist at CommSec
Ryan Felsman is a Senior Economist at CommSec
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The 2019/2020 financial year in review: CommSec's Craig James

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EXPERT OBSERVATION 
Inflation: The Consumer Price Index – the main measure of inflation in Australia – rose by 0.3 per cent in the March quarter (consensus: 0.2 per cent). In seasonally adjusted terms the CPI rose by 0.4 per cent. The annual rate of headline inflation lifted from 1.8 per cent to 2.2 per cent – the strongest pace in 5½ years. 
Underlying measures: The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.5 per cent in the March quarter (1.8 per cent annual); the weighted median rose by 0.5 per cent (1.7 per cent annual) and the CPI less volatile items rose by 0.5 per cent (2.1 per cent annual). Overall, underlying inflation rose by around 0.5 per cent in the quarter and by around 1.7 per cent over the year. Market goods and services less volatile items rose by 0.3 per cent in the quarter to be up 2.1 per cent on the year.
Main changes: The most significant price rises in the March quarter were for food and non-alcoholic beverages (+1.9 per cent), alcohol and tobacco (+1.6 per cent), education (+2.6 per cent) and health (+1.7 per cent). The most significant offsetting price falls this quarter are automotive fuel (-6.0 per cent), domestic holiday travel and accommodation (-3.1 per cent) and international holiday travel and accommodation (-3.0 per cent).
<h2>What does it all mean?</h2>
Aussies venturing out to buy essentials at supermarkets during the peak of the coronavirus (COVID-19) crisis would’ve noticed that food had become more expensive. In fact, prices of food and non-alcoholic beverages surged by an annual growth rate of 3.2 per cent in the March quarter – the strongest rate in 5½ years – propelling overall headline consumer prices higher. Why? Supply shortages due to the drought and bushfires – fruit and vegetable prices lifted sharply. 
The Bureau of Statistics said, “There were some price effects of COVID-19 apparent in the March quarter due to higher purchasing of certain products towards the end of the quarter, as restrictions came into effect. Most notably, rises were seen in, other non-durable household products (+3.4 per cent), which includes toilet paper; personal care products (+2.2 per cent), which includes soap and hand sanitiser; and other cereal products (+4.4 per cent), which includes rice and pasta.”
The lift in grocery prices broadly aligns with Coles’ sales report today. The supermarket chain not only reported a record 12.9 per cent lift in sales to $9.2 billion during the March quarter, but it also announced that its grocery and food prices rose by 2.6 per cent during the quarter, or by 1.8 per cent excluding tobacco and fresh foods. Why? COVID-19 panic buying saw a surge in shopper demand so the company scaled-back promotional activity with consumers preferring to purchase smaller grocery pack sizes in the frenzy.
But before anyone gets too excited about the headline annual inflation rate hitting the lower end of the Reserve Bank’s 2-3 per cent target band, the demand shock from the virus crisis is about to plunge Australia into the deflationary world, a world experienced by Japan and Europe in recent years. In fact, Reserve Bank Governor Philip Lowe warned last week that, “it is quite likely that year-ended headline inflation will turn negative in June. If so, this would be the first time since the early 1960s that the price level has fallen over a full year.”
 A sharp decline in crude oil and petrol prices, supportive government measures to cap and reduce prices - such as free childcare – tepid wage growth and weaker home rental prices are all likely to be disinflationary. Given the size of the housing cost basket within the consumer price index - around 23 per cent – falling home prices, higher vacancy rates and weaker rents could persist for the rest of 2020, weighing on consumer prices. 
Slow wage growth and falling prices of consumer goods – such as electronics, clothing and footwear – have been a feature of low-inflation for several years now. And businesses have been reluctant to pass on the rising cost of imported goods (due to the weaker Aussie dollar) amid consumer spending caution and intense competition. The huge impact of the economic shutdown will see deflation persist for a few quarters. In fact, Commonwealth Bank Group economists are forecasting the annual headline rate to fall to just 0.5 per cent in 2020 after turning negative in the June quarter. But the annual underlying inflation measure (trimmed mean) is estimated to hold up at 1.3 per cent in 2020.
RYAN FELSMAN senior economist at CommSec
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