Has the Australian economic transition already passed its sweet spot?
That’s the question that springs to mind looking back at the three Australian Industry Group performance of industry surveys this week.
Already we have seen that manufacturing is doing okay – but is in reality this is because much of it is either exposed to a falling Aussie dollar or related to housing construction.
We’ve seen the services industry look terribly weak – unless the business is, once again, related to housing.
So this morning’s news that the AiG-HIA Performance of Construction Index has fallen 5.7 points to a still healthy, but less ebullient 53.4 has got to make you wonder if this is as good as it gets.
Breaking up the index, the AiG said:
The slower pace of growth was evident in the activity (down 3.0 points to 54.1), new orders (down 4.7 points to 52.5) and deliveries from suppliers (down 1.9 points to 59.0) sub-indexes, and led to a marked easing in employment growth during the month (down 12.3 points to 50.5).
The survey shows residential building remains strong but commercial slipped 6.6 points to 51.8, less than two points away from the 50 mark that indicates the sector is in contraction. Engineering continues to contract, down 1.9 at 46.4.
AiG’s Director of Public Policy Dr Peter Burn summed this up saying:
With further growth in October, residential and commercial construction continued to lead the rebalancing of the economy away from the emphasis on mining investment that has been such a feature of domestic economic activity in recent years. However, the outlook slipped a notch or two last month with the pace of growth in activity and new orders easing in the residential and commercial construction sub-sectors and declining further in engineering construction. With official data showing housing loan approvals flat, construction businesses appear to have wound back the exuberance of recent months with only a marginal lift in employment levels in October.
But there there is a real chance that this week’s AiG indices are shining a light on Australia’s economic transition and in aggregate they suggest the best rate of transition may have already passed for Australia.
Consumer confidence remains around long-run averages. When you factor in the retail momentum and the employment gains, the pointers are that spending into the Christmas and January period should bounce back from the recent doldrums. The Aussie dollar’s fall is also a help to rebalancing and domestic economic activity.
But Australia’s economic strength remains very narrow and GDP growth below 2%, as Morgan Stanley highlighted earlier this week, may be the future – at least for 2015.
It’s too early for the RBA to cut rates. But if the retail spending does not marterialise over the coming months and if the Aussie dollar does not fall into the low 80’s before the February meeting their is a growing chance that a rate cut will be live in 2015.