Economy set to rebound, consumers confident: Savanth Sebastian
GUEST OBSERVER
Current Account: The broadest measure of the trade accounts – the current account – improved in the December quarter (smaller deficit), with the deficit falling from $10.2 billion to $3.85 billion – the smallest deficit in over 15 years.
Stronger trade sector: Net exports (exports less import_s) will contribute 0.2 percentage points to economic growth in the December quarter. CommSec estimates that the economy grew by 0.7 percent in the December quarter to be up 1.9 per cent over the year.
Consumer confidence hits 6-week high: The weekly ANZ/Roy Morgan consumer confidence rating rose by 6.1 points (4.7 percent) to a 6-week high of 119.1 in the week to February 26.
Government sector GDP: Overall, spending by the government sector rose by 1.5 percent in the December quarter and should contribute 0.3 percentage points to December quarter economic growth.
Lending lifts: Private sector credit rose by 0.2 percent in January after a 0.7 percent gain in December. Investor housing finance lifted 0.6 percent in January to stand 6.6 percent higher over the year – the fastest growth in 11 months.
The balance of payments data has implications for trade-exposed businesses and companies vulnerable to changes in the Aussie dollar. The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. Private sector credit figures have implications for finance providers, retailers, and companies dependent on business spending.
WHAT DOES IT ALL MEAN?
The Australian economy may have gone backwards in the September quarter, but the result for the December quarter is likely to be the polar opposite. Based on all the components currently available, the economy looks to have grown by a healthy 0.7 percent in the December. And while forecasts do have a margin for error the strength in dwelling investment, government spending, household consumption and net exports should ensure that Australia managed to stay clear of a technical recession. More importantly it is clear that activity levels have continued to improve in the past couple of months.
The shift from an economic contraction to an expansion is more important for household and business confidence. And in that context the latest reading on weekly consumer confidence is encouraging. Confidence levels lifted by almost 5 percent in the past week and are now holding at 6-week highs. Interestingly the outlook on family finances was far more positive – despite the news last week on the cuts to penalty rates.
The latest lending (private sector credit) figures suggest a modest pullback in borrowing. But it is import_ant to point out that lending recorded the biggest lift in 15 months in December and only partially gave some of that back in January. The weakness was largely due to a modest slide in business credit which would be expected given the slowdown in financing in the post-Christmas period.
Interestingly home lending continues to lift, dominated by investor credit growth. In fact annual growth in investor finance is now at an 11-month high. The measures taken by regulators to curb investment lending had a temporary impact that is now fading.
Overall the Reserve Bank is unlikely to be surprised with the latest results. No doubt policymakers will continue to discuss key issues like housing affordability, but overall the central bank seems upbeat on the medium-term outlook for the Australian economy. CommSec expects no change to interest rates over the rest of 2017.
What do the figures show?
BALANCE OF PAYMENTS
The broadest measure of Australia's external position - the current account – improved in the December quarter (smaller deficit), with the deficit falling from $10.2 billion to $3.85 billion.
The balance of goods and services was in deficit by $4.7 billion in the December quarter after a $3.5 billion deficit in the September quarter.
At the end of the December quarter, net foreign equity was $1.4 billion – essentially Australians own more assets overseas than foreign investors own here in Australia. But the positive net foreign equity position weakened by $5.8 billion over the December quarter.
The trade sector (exports less import_s) will contribute 0.2 percentage points to economic growth in the December quarter.
Terms of trade (ratio of export to import_ prices) rose by 9.1 cent to a 27-month high of 102.9 in the December quarter after a 2.3 percent increase in the June quarter. The terms of trade for goods rose by 11.3 percent and the terms of trade for services rose by 1.3 percent.
Net foreign debt fell from $1,048.6 billion to $1,023.1 billion as at the end of the December quarter.
GOVERNMENT FINANCES
- Government consumption spending was flat in the December quarter after a 0.2 per cent fall in the September quarter. Total public investment rose by 7.7 per cent in the December quarter after falling by 7.8 per cent in the September quarter. Overall, spending by the government sector rose by 1.5 per cent in the December quarter.
CONSUMER SENTIMENT
The weekly ANZ/Roy Morgan consumer confidence rating rose by 6.1 points (4.7 percent) to a 6-week high of 119.1 in the week to February 26. Confidence is up 7 percent over the year and above the average of 119.1 since 2014.
All five components of the index rose in the latest week
The estimate of family finances compared with a year ago was up from +2 to +11;
The estimate of family finances over the next year was up from at +26 to +34;
Economic conditions over the next 12 months was up from 0 to +5;
Economic conditions over the next 5 years was up from +5 to +7;
The measure of whether it was a good time to buy a major household item was up from +36 to +40:
The reading of inflation expectations two years ahead rose from 4.5 percent to 4.7 percent. Inflation expectations have now held above 4 per cent for the past 11 weeks.
PRIVATE SECTOR CREDIT
Private sector credit (lending) rose by 0.2 percent in January after a 0.7 percent gain in December. Annual credit growth eased from 5.6 percent to 5.4 percent.
Housing credit grew by 0.5 percent in January to be up 6.3 percent on a year ago – equalling the December result and the slowest annual growth in 30 months.
Owner occupier housing credit rose by 0.5 percent in January to stand 6.3 percent higher than a year ago – the slowest growth in 15 months. Investor housing finance lifted 0.6 percent in January to stand 6.6 percent higher over the year – the fastest growth in 11 months.
Personal credit fell by 0.2 percent in January to be down 1.3 percent over the year – near the biggest annual decline in 4 ½ years.
Business credit fell by 0.3 percent in December after rising by a sizeable 1.1 percent in November. Business credit is 4.7 percent higher than a year ago.
WHAT IS THE IMPORTANCE OF THE ECONOMIC DATA?
The quarterly Balance of Payments figures have few short-term effects on financial markets. The importance of the data is merely to highlight Australia’s trading position with the rest of the world as well as the contribution of foreign trade (exports less import_s) to the latest estimates of economic growth.
The Australian Bureau of Statistics releases the quarterly Government Finance Statistics near the start of March, June, September and December. The data details public sector consumption and investment spending and indicates the sector’s contribution to economic growth.
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.
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.
WHAT ARE THE IMPLICATIONS FOR INTEREST RATES AND INVESTORS?
The improvement in our broadest trade measure – the current account – is expected to continue. The mining investment boom has left us with expanded productive capacity. And exports of liquefied natural gas (LNG) will ramp up over the next year or so.
The ongoing strength in exports and improvement in the current account deficit will keep upward pressure on the Aussie dollar. No doubt the Reserve Bank would prefer a lower Australian dollar to help rebalance the economy away from mining to the non-mining sector.
The jobless rate is at a multi-year lows, interest rates are super-low, more homes are being built than ever before, retail spending is lifting and the farm sector prospects are bright. Even the global picture is brightening.
Interest rates will remain on hold over the rest of 2017.
Savanth Sebastian is an economist for CommSec