WEEKLY ECONOMIC COMMENTARY Week beginning 9th October 2017

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1 WEEKLY ECONOMIC COMMENTARY Week beginning 9th October 2017 ECONOMIC DATA ROUNDUP DATA RELEASED LAST WEEK Economic Data Period Actual Previous ANZ Job Ads Sept 0.0% +2.0% Building Approvals August +0.4% -1.7% Retail Trade August -0.6% +0.0% International Trade in Goods & Services August +$989m +460m ANZ job ads were unchanged in September (after six consecutive monthly increases) and are now up 12.5% over the year (down from +13.3% annual growth last month). Residential building approvals were up 0.4% in August to be down 15.5% over the year. Approvals for detached houses were down 1.1% for the month (+2.4% over the year) while approvals for other dwellings, namely high rise, high density apartments were up 2.3% in August (-29.5% annually). By state, there was weakness in NSW (-9.5%) and WA (-7.3%) which was offset by strong gains in QLD (+13%) and SA (+3.7%). Building Approvals Retail sales were weaker than expected, falling 0.6% in August (the largest monthly fall since March 2013) with retail sales up only 2.1% over the year. Sales fell across most sub-categories including food (-0.6%), household goods (-1.0%), clothing (-0.2%) and cafes, restaurants and takeaway food (-1.3%). Department stores and other retailers were the exception (+0.7%), but this came after a large (-2.6%) fall in July. The trade balance recorded a surplus of $989m in August with the July surplus also revised higher (up to $808m). The increase in the surplus this month was due to a 0.5% increase in exports resulting from higher exports of iron ore (as a result of higher prices) and continued growth in travel exports. Imports were flat in the month as a fall in consumer and capital goods imports were offset by a rise in imports of intermediate goods (mainly fuels). As was widely expected, the RBA has once again decided to leave the official cash rate unchanged at 1.5% for the fourteenth month after its monthly Board meeting last week. Again their accompanying statement contained few material changes from last month however the RBA s outlook on the domestic economy seemed incrementally more positive. The RBA did note that the higher exchange rate is weighing on the outlook for output and employment as well as slow growth in real wages and high levels of household debt are likely to constrain growth in household spending. In other data releases, according to the Housing Industry Association, house sales were up 9.1% in August after two months of heavy declines. This was boosted by the introduction of stamp duty concessions for first home buyers in Victoria and New South Wales at the start of July. The NAB online retail sales index was up 1.7% in August to be up 10.3% annually. The Melbourne Institute inflation gauge rose 0.3% in September (+2.5% annually) and the CoreLogic house price index rose 0.3% in September (with house prices in Sydney down 0.1% in the month). Data over the next week Economic Data Date Period Forecast Previous NAB Business Survey - Conditions 10 Oct September n/a +15 NAB Business Survey - Confidence 10 Oct September n/a +5 Westpac/MI Consumer Sentiment 11 Oct October n/a +2.5% Housing Finance 12 Oct August +1.0% +4.5% Weekly Market Commentary 1

2 ECONOMIC COMMENTARY LAST WEEK The RBA predictably left the official cash rate unchanged at a record low of 1.50% again last week. While the RBA Governor has been commenting lately that the next move in rates is up, the post-meeting accompanying monetary policy statement retained a neutral tone and gave no hints of any imminent rate move. The weak retail sales data gave the markets a bit of a scare last week but most economists put the -0.6% monthly fall down to statistical error which should be reversed next month. As a result, market focus and news was full of offshore events. In particula, the horrific Las Vegas shooting and talk about tightening US gun control laws as well as the Catalonia regional vote for independence from Spain clashes between the Catalan authorities and the Spanish government are causing some risk-off trading in Europe. Domestic bond yields drifted lower across the curve last week. By the close of trading on Friday, the 90-day bank bill was trading at 1.70% from 1.71% a week earlier. In the long term maturities, 3 and 10 year bond yields closed at 2.12% and 2.82% respectively, from 2.15% and 2.84% a week earlier. CURRENCY The Australian dollar weakened and fell to a three-month low last week after the RBA left the official cash rate unchanged and reiterated that growth and CPI may be slower than forecast if the AUD keeps rising. Weaker than expected retail sales data and a stronger US dollar following some solid economic data releases also weighed on the local currency which traded down through USD0.78 to a low of USD last week. By the close on Friday, the Australian dollar was trading at USD from USD a week earlier. EQUITIES Equity markets started the week with the Dow Jones index posting a new record high on Monday, which was followed by new highs for most of the week. Speeches by two US Federal Reserve Board members confirming that they thought one more US rate hike this year and another three next year are appropriate given the economy s strength gave US markets the boost. Our market for once did not follow the offshore lead, with weakness in financials, energy stocks (due to lower oil price) and QBE (on rising individual risk and disaster claims) weighing on our market but our market did manage to post a small rise over the week. By the close on Friday the S&P/ASX200 Index was trading at 5,710.7 compared to 5,685.8 a week earlier. THIS WEEK This week sees the release of the latest monthly business survey and consumer sentiment data. The conflict between strong business conditions and weak consumer sentiment is expected to continue in the short term. August housing finance data is also due for release and is expected to show a continued trend away from investor finance toward owner-occupiers. With financial stability very much a part of future monetary policy consideration, there will be some interest in this Friday s Financial Stability Review from the RBA and its reading of the housing market and household debt. INTEREST RATE VIEW After a period where the RBA was seen to be on hold for the foreseeable future and so yield direction was driven by offshore developments, domestic fundamentals are now back in focus. The RBA Governor recently highlighted three factors that will place an obstacle to a future a rate hike: low wage growth, low inflation and a strong Australian dollar. So with GDP, employment and inflation all under the microscope, economists are changing their forecasts for monetary policy based on their view for these domestic fundamentals. Financial market pricing still has one RBA rate increase now fully priced in by July/August next year. Economic Data 12 months ago 6 months ago 3 months ago 1 month ago Now Official Cash Rate day Bank Bill day Bank Bill year swap year swap year swap year swap AUD/USD S&P/ASX200 Index 5, , , , ,710.7

3 CHART OF THE WEEK In World s Most Liveable Cities, Few Can Afford to Buy a Home Home ownership among young Australians is at lowest on record First-time buyers handicapped by tax perks favouring investors Source: Bloomberg - by Emily Cadman, 5 th October 2017 Home ownership among young Australians has fallen to the lowest level on record, as an explosive property boom squeezes out all but the wealthiest. Supercharged by record low interest rates, a lack of supply and a tax system that favours property investors, home prices have surged more than 140% in the past 15 years, propelling Sydney past London and New York to rank as the world s second-most expensive housing market. Melbourne, ranked the world s most liveable city the past seven years by the Economist Intelligence Unit, is now the planet s sixthmost expensive place to buy a house. In response, home ownership among the young has plunged: only 45% of 25 to 34 year-olds own their own home, down 16% from the 1980s, with almost half the decline coming in the past decade. At the same time, hefty mortgages have pushed household debt to a record, acting as a drag on the economy s 26 years of unbroken growth. As more people retire still owing a mortgage, or renting, they are more likely to qualify for government welfare, undermining the $2.3 trillion pension savings system. The great Australian dream of home ownership is becoming a nightmare, said Brendan Coates, a housing policy expert at the Grattan Institute. It s down to a collective failure of government policy that will take at least two decades to fix. Voter angst over housing affordability is mounting: almost 90% of Australians fear future generations won t be able to buy a home, according to an Australian National University survey. Failure to address the issue is heaping pressure on a government already under fire for the botched rollout of a $49bn national high-speed internet network, and energy-policy bungling that s sent power bills soaring and triggered fears of blackouts this summer. One of the biggest flashpoints are tax incentives that have turned housing into a speculative financial asset. First-home buyers complain they can t compete against investors, who through a perk known as negative gearing can claim the costs of owning a property-for-rent -- including mortgage interest - as a tax deduction against other income. The allure of property investment was turbocharged in 1999, when capital gains tax was halved. With housing prices seen as a one-way bet, investors piled in. More than 2 million, or one-in-12, Australians own an investment property, with almost 30% of those owning two or more.

4 CHART OF THE WEEK More money going on servicing a mortgage means there is less to spend elsewhere, dragging on economic growth, said Paul Dales, chief Australian economist at Capital Economics. It won t take many rate rises for indicators to start flashing amber and red for more-indebted households. As the average price of a Sydney home sailed past $1 million, housing affordability fell victim to the hyperpartisanship that has gripped Canberra over the past decade and paralysed policy making. During last year s election campaign, when the opposition Labor party proposed changes to limit negative gearing to newly-built houses and reduce the capital gains tax discount, Prime Minister Malcolm Turnbull retaliated by ruling out any changes and launched an assault claiming Labor s move would take a sledgehammer to the property market and punish mum and dad investors. A package of measures in the May budget aimed at improving housing affordability only tinkered at the edges - targeting overseas investors who leave properties vacant and offering tax breaks for people saving for a deposit on their first home. State governments have also done little to address the issue, relying on policies such as stamp duty discounts or grants to first-home buyers that just act to push prices up even further. There s no way we can fully put the genie back in the bottle, Coates said. Pretty much anyone under the age of 35 you re going to find it pretty hard to buy a home unless they are a high-income earner, he said. Politicians, meantime, have offered only superficial solutions. Former Treasurer Joe Hockey said buyers struggling to get into the market should simply get a good job that pays good money. Deputy Prime Minister Barnaby Joyce said people priced out of Sydney should have the gumption to move to rural areas like Charleville in outback Queensland - where houses are about one-sixth the price of Sydney, but youth unemployment in the region is the highest in the nation. What politicians have offered so far are Band-Aid solutions that might be popular in the short-term but will be ineffective in the long-run said Judith Yates, who has advised the government on housing policy and is an honorary associate professor at the University of Sydney. There hasn t been a serious attempt to tackle the fundamental causes of declining affordability. In contrast, other global cities have taken more draconian measures to rein in home prices. Singapore has rolled out a series of measures from banning interest-only loans to pushing up stamp duty, triggering a three-year slide in prices. In Canada, prices have slumped in Toronto after the provincial government announced a slew of measures, including a 15% tax on foreign buyers and the introduction of rent controls. Adding to demand pressures, Australia s migration program has helped swell the population by almost 4 million since 2006, with most settling in the major cities. Supply has been unable to keep up, with dwelling completions running below underlying demand for more than a decade. Much of the new housing is small apartments aimed at investors, rather than families. There is also a social cost to sky-high house prices. Workers such as teachers, nurses and other low-to-middle income earners can t afford to live in the communities they serve, while young people who stay at home longer while saving a deposit might delay marriage and childbirth. It s a very different atmosphere in Australia, said Professor Richard Ronald of the University of Amsterdam s Centre for Urban Studies. I haven t come across this kind of resistance elsewhere to the understanding of Generation Rent as a fundamental shift in history.

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