Record Aussie commodity export earnings
Annual business credit growth rate hits 2-year high
Private sector credit; Credit cards; Mining and energy exports
- Lending: Private sector credit (effectively outstanding loans) rose by 0.3 per cent in February (consensus: +0.2 per cent) after a 0.2 per cent rise in January. Annual credit growth fell to a five-year low of 4.2 per cent in February. But the annual business credit growth rate rose to a 2-year high of 5.3 per cent.
- Credit cards: According to APRA, bank lending to households by credit card fell by 4.5 per cent in the year to February – the second biggest annual decline in 151⁄2 years of records.
- Record resources and energy exports: According to the Department of Industry, Innovation and Science, Australia’s export earnings are forecast to hit a fresh record-high of $277.8 billion over the year ended June 30 2019, up from a revised $227.5 billion over the year ended June 30 2018.
Private sector credit figures have implications for finance providers, retailers, and companies dependent on business spending. Credit card data is important for the retail and financial sectors. The trade data has the potential to affect the Aussie dollar so it may be important for exporters and importers.
What does it all mean?
- Supply disruptions have boosted the prices of Australia’s major bulk commodities, iron ore and coal. In fact, according to the Department of Industry, Innovation and Science, “prices of Australia’s major resources commodities recently hit 7-year highs.” And the weaker value of the Aussie dollar against the greenback is also boosting the value of our export earnings. Energy and mining-related exports are projected to hit a record-high of $277.8 billion over the year ended June 30 2019.
- The slowdown in credit growth continues. Annual housing credit growth is decelerating due to the decline in housing finance and falling home prices, particularly in Sydney, Melbourne and Perth. Annual investor housing credit growth is the weakest on record.
- Business credit, however, continues to hold up, despite a moderation in conditions and confidence (according to the NAB business survey). Non-mining business investment is still firm and is expected to lift further this year, supporting the jobs market.
- Aussie consumers are still using their credit cards, but more are paying off the debt by the due date. The annual growth rate of credit card debt is near 16-year lows. That said, many consumers are preferring to use debit cards and ‘buy now, pay later’ payment methods, such as Afterpay to manage their finances.
What do the figures show?
Private sector credit
- Private sector credit (effectively outstanding loans) rose by 0.3 per cent in February (consensus: +0.2 per cent) after a 0.2 per cent lift in January. Annual credit growth fell from 4.3 per cent in January to a five-year low of 4.2 per cent in February.
- Housing credit grew by 0.3 per cent in February. But
annual growth fell from 4.4 per cent to 4.2 per cent – the slowest growth rate on record.
- Owner occupier housing credit rose by 0.4 per cent in February to stand 5.9 per cent higher over the year – the weakest annual growth rate for 31⁄2 years.
- Investor housing finance was flat in February with annual growth the slowest on record at 0.9 per cent.
- Personal credit fell by 0.1 per cent in February to be down 2.7 per cent over the year.
- Business credit rose by 0.3 per cent in February – the ninth consecutive monthly gain. Annual growth lifted from 5.2 per cent to 5.3 per cent – the strongest growth rate in over two years.
- The M3 money aggregate and Broad Money both lifted by 0.6 per cent in February. Annual growth of the M3 measure rose from 2.6 per cent to 3.1 per cent. And the Broad Money measure rose from 2.5 per cent to 3.0 per cent.
- Term deposits with banks rose by $5.1 billion to a record $626.7 billion in February. And the annual growth rate lifted to a 22-month high of 7.6 per cent in February.
- Loans and advances by banks grew by 4.5 per cent in the year to February – unchanged from January – near the slowest growth rate in 261⁄2 years.
- According to APRA, loans by banks to households via credit cards rose from $39.7 billion in January to $40.3 billion in February. But the 4.5 per cent fall was the second biggest on record.
- Loans and advances by non-bank financial intermediaries rose by 11.0 per cent in the year to February, up from 9.7 per cent over the year to January.
- Deposits at banks rose by 0.2 per cent in February after lifting by 1.0 per cent in January. Annual growth rose from 2.6 per cent in January to 3.1 per cent in February – an 11-month high.
What is the importance of the economic data?
- Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.
- The Department of Industry, Innovation and Science releases the “Resources and Energy Quarterly” report providing an update on Australia’s mining and energy sectors.
What are the implications for interest rates and investors?
- Australia continues to amass sizeable trade surpluses. Commodity prices have lifted and demand from China remains firm. Export income is near record highs, but iron ore, coal and LNG prices are forecast to decline over the longer run as supply and demand rebalance.
- Better job security and deleveraging of household balance sheets are likely to account for the reduction in credit card and other personal debt in the economy.
- The growth in business lending is encouraging, but Reserve Bank policymakers recently expressed concerns that “the growth in business lending had been entirely to large businesses, with one estimate suggesting that lending to small businesses had declined slightly over the preceding year.”
- And the availability and supply of credit to households continues to be a concern due to tighter lending standards. Demand for housing credit, particularly for investors, has fallen sharply. But the modest improvement in owner- occupier credit growth in the month of February suggests that borrowers of higher credit quality can still gain access to loans.
- For banks, challenges remain. Slower growth of deposits, intense competition from non-bank lenders and reduced demand for home loans may impact profit margins. But funding costs appear to have eased with 90-day bank bill yields falling from 2-year highs of 2.12 per cent in June 2018 to 1.78 per cent, giving banks flexibility on mortgage rates as they compete aggressively to retain market share in the home loan market. Consumers could be winners if this materialises, especially with global central banks becoming more accommodative in their interest rate policy stances.
- Experts expect official interest rates to remain stable for the foreseeable future, but the risks are tilted to rate cuts in the current environment given slower domestic and global economic momentum.
Caution: Budget stimulus ahead
- Budget: The 2019 Federal Budget will be handed down on Tuesday. The budget accounts are effectively balanced and surpluses are in prospect in coming years. The Government is likely to unveil measures to stimulate the economy and lift lagging growth rates.
The Federal Budget is likely to contain spending and tax measures designed to stimulate the economy.
What is the State of Play?
- Regular readers would be aware that we provide a monthly update of the budget position. So you would be well aware that the underlying Budget is effectively balanced. The deficit for the full 12 month period to February was just $953 million, less than 0.1 per cent of GDP (actually 0.05 per cent of GDP).
- In addition, over the same 12-month period to February, the fiscal balance was in surplus by $7,445 million with the net operating balance in surplus by $10,219 million.
- The Government continues to show restraint on spending with payments in the eight months to February around $2.9 billion less than assumed by the finance boffins. Revenues are just $163 million lower than where the Department of Finance thought they would be.
- But what lies ahead? The pre-eminent experts on all things Budget is Deloitte Access Economics. Deloitte releases a regular Budget Monitor including a freely available summary (https://www2.deloitte.com/au/en/pages/media-releases/articles/budget-monitor.html ) as well as a more detailed 147 page report for subscribers.
- Deloitte expects an underlying cash deficit of $2.1 billion to eventually be recorded for this year (2018/19) –“pretty much a rounding error”. Looking ahead “Come 2019-20 and this year’s rounding error of a deficit grows into a fully-fledged cash underlying surplus of $9.8 billion. Our estimates are $3.1 billion and $5.7 billion, respectively, better than the official estimates of cash balances from the Mid-Year Economic Fiscal Outlook. Our matching fiscal balances are surpluses of $1.2 billion and $10.0 billion, respectively.”
- The risk is that the Government will unveil spending measures that widen this year’s expect deficit and reduce next year’s expected surplus. Analysts generally expect the Government to unveil tax cuts (either some combination of changes to income bands or changes in tax rates). We contend that fiscal stimulus is preferable to the ‘blunt instrument’ of monetary policy if the aim is to lift the growth pace of the economy in the face of the globally- generated slowdown.
What measures are expected?
- AAP provides a comprehensive rundown each year of announced budget measures and budget speculation. The analysis from Paul Osborne follows:
- Overall theme: “A stronger economy and a secure future”
- Better than expected surplus for 2019/20 (MYEFO: $4.1 billion in 2019/20)
- 3 per cent growth for 2019/20 (MYEFO forecast)
- 5 per cent unemployment rate for 2019/20 (MYEFO forecast)
- Migration cap to be reduced to 160,000 from 190,000
- 1.25 million new jobs to be created over the next five years
- Expectation of a “stimulus” worth about $6 billion, adding about 0.4 percentage points to GDP
- Likely bring-forward of the July 2022 income tax cuts, on top of those already starting July 1 this year, as part of an already-legislated $144 billion plan
- Possible improvements to tax offsets for low-income earners
- Rules around $69 billion GST revenue distribution to the states have changed, with WA the main beneficiary
- Instant asset write-off extended to June 2020 and upped from $20,000 to $25,000. Allows small business with an annual turnover of less than $10 million to deduct the cost of assets such as cars and equipment
- Tax office and other agencies to crack down on welfare cheats and tax dodging
- $75 billion infrastructure plan over 10 years continues
- Business case for Melbourne airport rail link
- City deals for Adelaide, Hobart, Townsville, Launceston, Western Sydney, Darwin, Geelong, South East Queensland and Perth
- $730 million north Queensland roads plan; $254 million for Sydney, NSW central coast “congestion busting” road upgrades
- Programs and policies bundled under a Long-Term National Health Plan
- $220 million from Medical Research Future Fund for research into heart disease
- $496 million for Victorian cancer research, services and facilities
- $200 million to reduce out of pocket costs for scans such as ultrasounds and x-rays
- $62 million plan over four years for GP, emergency care and specialist services in rural areas
- $600 million boost for financial regulators ASIC and APRA to deal with banking Royal Commission fallout
- $294 million to upgrade security at airports in a bid to prevent terrorist attacks
- Australian Space Agency to be funded
- $2 billion for Emissions Reduction Fund, now called the Climate Solutions Fund
- $1.4 billion for Snowy Hydro 2.0
- $56 million for Battery of the Nation and Marinus Link projects in Tasmania
- $10 million business case for energy projects in north and central Queensland, alongside a shortlist of 12 further power projects which could be underwritten
- $60 million for James Cook University’s Cairns Tropical Enterprise Centre
- $60 million indigenous education hub in Melbourne
- $78 million to provide more housing for women and children fleeing family violence
- $129 million to extend cashless welfare card to all of Northern Territory, and to Cape York communities in Queensland
- National Disability Insurance Scheme fully-funded
- $28 million to improve weather monitoring, especially in flood-prone areas
- $9 million extra (total package $20m) to deal with yellow crazy ants in north Queensland
- $12 million for Cooktown 2020 Festival (250th anniversary of Cook’s landing) and replica HMB Endeavour to circumnavigate the country
Add in the following from News Corp newspapers today:
- “Additional funding $1.1 billion for local governments under the Roads to Recovery program, which allows investment in regional Australia. Extra funding, $550 million, for the Black Spot Program which targets high-risk locations. More funding, $571.1 million, to improve the safety and efficiency of heavy vehicle operations.”
- Also from Minister for Finance: $1.6 billion of “investment into critical road and rail infrastructure across Perth and regional Western Australia.”
What does it all mean?
- The US-China trade war, Brexit, US Government shutdown and higher US interest rates have all served to reduce the momentum of the global economy. Add in the latest addition to the ‘wall of worry’ – recession fears – all because short-term interest rates are now above longer-term yields. Domestically, softer wage growth and falling home prices in Sydney and Melbourne are the key concerns.
- But on the other side of the equation, Australia’s budget is effectively balanced and there is room to cut interest rates further if necessary. So we are in a position to do something if the downward momentum continues or picks up speed.
- It also has to be remembered that unemployment is at multi-year lows across the globe – the US, Japan, Europe, UK as well as in Australia. Global inflation is low – in large part due to the globalisation of spending and employment and technologically-driven disruption. So economies are performing OK, but there are structural factors affecting global inflation, and in turn, wages.
- All it would take is resolution of the Brexit stalemate and successful completion of US-China trade talks and global economic momentum would shift around from negative to positive. Chinese authorities are also actively stimulating their economy at present.
- Experts expect interest rates to remain unchanged for the foreseeable future. But the risks are tilted to lower rates ahead.
Investor Signposts: Week Beginning March 31 2019
Australia: Budget time again
- In Australia over the coming week, the handing down of the Federal Budget and the Reserve Bank’s interest rate decision both dominate. Tier-1 data includes retail and international trade, home prices and business confidence.
- The week kicks off on Monday when CoreLogic releases its estimates of home prices for March. In February, the CoreLogic Home Value Index of national home prices fell by 0.7 per cent to be down 6.3 per cent over the year.
- Also on Monday, NAB issues its March business survey ahead of the Federal Budget. Business confidence fell to three- year lows of 2 points in February. Political uncertainty, challenging retail conditions, drought, falling property prices and slowing domestic demand are weighing on sentiment.
- On Tuesday, the Bureau of Statistics (ABS) publishes the building approvals data – a key leading indicator for home building. And the regular weekly reading on consumer confidence is published by ANZ and Roy Morgan.
- The Reserve Bank Board meets on Tuesday but no rate change is expected.
- Also on Tuesday, the Federal Budget is handed down at 7.30pm AEDT. The Federal Budget is seen as a once-a-year event. But in reality the government’s finances can be tracked over time.
- The government’s finances are better-than-expected. In the twelve months to February 2019, the Budget deficit stood at $953 million (0.05 per cent of GDP) – the smallest rolling annual result in a decade. Over the same 12-month period to February, the fiscal balance was in surplus by $7,445 million with the net operating balance in surplus by $10,219 million.
- The budget is in good shape because consumers are still spending, people are getting jobs, companies are generating profits and commodity prices – especially iron ore and coal – have been lifting on Chinese stimulus and supply disruptions. With a Federal election due in May, the budget will likely be focused on tax cuts for individuals and business, combined with more infrastructure spending.
- On Wednesday the ABS issues the international trade and retail trade data for February. Consumer spending is a key uncertainty for the interest rate outlook. But Australia’s trade position is in good shape with the biggest surplus in two years posted in January ($4,549 million).
- Also on Wednesday, new vehicle sales data is issued with sales down by 5.2 per cent over the year to February.
- On Friday, the AiGroup’s construction gauge is also issued. Residential housing construction activity is slowing.
Overseas: US jobs and retail spending in focus
- US reports on jobs and retail sales are the key interest points in the coming week. Manufacturing and services activity gauges in the US and China will also be keenly observed.
- The week begins on Monday in the US when retail sales, the Institute of Supply Management (ISM) manufacturing gauge, business inventories and construction spending data are all released. US retail sales are forecast to lift by 0.3 per cent in February after increasing by 0.2 per cent in January. The ISM manufacturing index is tipped to increase by 0.6 points in March after falling to a two-year low of 54.2 points in February.
- On Tuesday in the US, weekly chain store sales, durable goods orders, the ISM New York Index and vehicle sales data are scheduled. New orders for core capital goods rose by 0.8 per cent in January – the most in six months – and shipments increased. But durable goods orders are forecast to fall by 0.8 per cent in February.
- On Wednesday in the US, weekly mortgage applications, the ISM non-manufacturing business activity index and the ADP employment data are issued. ADP private payrolls are forecast to have lifted by 180,000 in March after a similar 183,000 jobs were added in February. Private sector labour market demand remains solid with broad- based gains from construction to professional and business services.
- On Thursday in the US, the usual weekly data on claims for unemployment insurance is released with the Challenger job cuts figures. In February, US employers announced the largest number of monthly job cuts (76,835) in more than 31⁄2 years.
- On Friday in the US, the all-important employment report is released for March. Only 20,000 jobs were added in February – the least since September 2017. Winter weather likely reduced payroll growth with construction jobs down by 31,000. But the unemployment rate remained steady near five decade lows at 3.8 per cent. And average hourly earnings grew by 3.4 per cent over the year to February – the strongest growth rate in a decade.
- Also on Friday, consumer credit data is scheduled. Credit is forecast to lift by US$15 billion in February after rising by US$17.05 billion in January.
- In China over the week, Caixin releases its private sector manufacturing and services sector activity gauges for March.
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