Craig James calls out the RBA for cutting

Becasue it’s boom, baby, boom:

Record exports, building, business loans

Strongest economic growth in 2½ years

Balance of Payments; Government Finance; Building Approvals; Credit

¾ Dwelling approvals: Dwelling approvals rose by 3.0 per cent in April. The value of all building soared by 18.3 per cent – the biggest monthly rise in four years. Building was at record highs in trend terms.

¾ Record foreign debt: Net foreign debt rose by $9.1 billion to a record $1027.8 billion as at the end of the March quarter.

¾ Solid trade sector: Net exports (exports less imports) will provide a solid 1.1 percentage-point contribution to economic growth in the March quarter. The CBA Group estimates that the economy grew by 1.1 per cent in the March quarter to be up 3.2 per cent over the year. If the data is confirmed tomorrow it would show the economy growing at the fastest annual rate in 2½ years.

¾ Lending up: Private sector credit (lending) rose by 0.5 per cent in April to stand 6.7 per cent higher than a year ago – the strongest growth in seven years.

The approvals data has implications for banks, building and building material companies. The balance of payments data has implications for trade-exposed businesses and companies vulnerable to changes in the Aussie dollar.

What does it all mean?

Did the Reserve Bank get it wrong? Or do policymakers just have a new-found belief that the economy can go faster without generating higher inflation?

Certainly all of today’s economic readings were strong: credit (lending) growth at 7-year highs; biggest lift in building work in four years; record value of building approvals; record exports; and a solid export contribution to economic growth. Overall, the Australian economy may have grown at the fastest pace in 2½ years in the March quarter. We will know tomorrow. But we tip 1.1 per cent economic growth in the quarter to be up 3.2 per cent over the year. Economic growth over the past three quarters may have run at a 3.7 per cent annual rate.

The gloomsters may point to Australia’s record foreign debt and high current account deficit. The more positive observers will point out that debt servicing is not far from the best levels in over 30 years.

Foreign debt is an issue for global investors. But the half a cent lift in the Aussie dollar after today’s data suggests that investors understand the somewhat unique Australian situation.

What do the figures show?

Building Approvals:

Dwelling approvals rose by 3.0 per cent in April after a 2.9 per cent gain in March. Over the past year 235,025 new homes were approved, up from March but still down on the record 239,507 approvals in the year to October 2015.

House approvals fell by 1.9 per cent in April (private sector fell by 2.3 per cent). Meanwhile ‘lumpy’ apartment approvalsrose by 8.1 per cent in April after rising by 2.4 per cent in March. Private sector apartment approvals rose by 8.7 per cent in April.

Dwelling approvals in April were up by 0.7 per cent on a year ago with house approvals down by 8.9 per cent while apartments are up by 11.5 per cent.

Across states and territories in April: NSW approvals rose by 10.4 per cent; Victoria fell by 2.7 per cent; Queensland rose by 6.8 per cent; South Australia rose by 13.8 per cent; Western Australia fell by 0.6 per cent; Tasmania rose by 14.0 per cent. In trend terms, approvals fell by 15.2 per cent in the Northern Territory and rose by 6.7 per cent in the ACT.

The value of all commercial and residential building approvals rose by 18.3 per cent in April (biggest rise in 4 years) after falling by 4.3 per cent in March. Residential approvals rose by 8.4 per cent with new building up by 7.2 per cent while alterations & additions soared by 18.7 per cent. Commercial building rose by 47.3 per cent in April to be up 32.4 per cent over the year.

Balance of Payments

The broadest measure of Australia’s external position – the current account – improved in the March quarter (smaller deficit), with the deficit narrowing from $22.6 billion to $20.8 billion.

The balance of goods and services was in deficit by $8.1 billion after a $10.9 billion deficit in the December quarter. Exports rose by 4.4 per cent in real terms while imports fell by 0.8 per cent.

At the end of the March quarter, net foreign equity was $15.7 billion – essentially Australians own more assets overseas than foreign investors own here in Australia. But the positive net foreign equity position weakened from $57.89 billion in the December quarter.

The trade sector (exports less imports) will provide a 1.1 percentage point contribution to economic growth in the March quarter.

Terms of trade (ratio of export to import prices) fell by 1.9 per cent to 78.7 in the March quarter – lowest level in 10 years. The terms of trade for goods fell by 2.8 per cent but the terms of trade for services rose by 1.0 per cent.

Net foreign debt rose by $9.1 billion to a record $1,027.8 billion as at the end of the March quarter.

The debt servicing ratio (net income on foreign debt to goods and services credits) improved from a near 4-year high of 8.2 per cent to 8.1 per cent in the March quarter.

The current account deficit to GDP ratio eased from a near 6-year high of 5.5 per cent to 5.1 per cent in the March quarter.

The net foreign debt to GDP ratio rose from 63.8 per cent to a record high of 64.3 per cent in the March quarter.

Government Finances

Government consumption spending rose by 0.9 per cent in the March quarter after a 0.6 per cent increase in the December quarter. Total public investment rose by 0.7 per cent in the March quarter after rising by 5.8 per cent in the December quarter.Overall, spending by the government sector rose by 0.8 per cent in the March quarter after lifting by 1.5 per cent in the December quarter.

Private sector credit

Private sector credit (lending) rose by 0.5 per cent in April after a 0.4 per cent gain in March. Annual credit growth rose from 6.4 per cent to 6.7 per cent – equalling the fastest annual pace in 7 years.

Housing credit grew by 0.4 per cent in April after a 0.5 per cent gain in March. Housing credit is up 7.0 per cent on a year ago.

Owner occupier housing credit rose by 0.5 per cent in April to stand 7.3 per cent higher than a year ago – the fastest annual growth since September 2010. Investor housing finance lifted 0.3 per cent in April to stand 6.5 per cent higher over the year – the slowest growth in 31 months.

Personal credit was down 0.1 per cent in April after falling by 0.3 per cent in March. Personal credit was down 0.9 per cent over the year – just up from the slowest annual rate in almost 4 years.

Business credit rose by 0.8 per cent in April to record highs. Business credit is 7.4 per cent higher than a year ago – the fastest growth rate in seven years.

What is the importance of the economic data?

The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.

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 imports) to the latest estimates of economic growth.

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?

Today’s data will give the Reserve Bank policymakers some extra time to assess the next move. It is hard to fault the latest data readings with most parts of the economy now pointing north. Ordinarily data similar to that released today would cause analysts to tip rate hikes, rather than rate cuts. But at present deflation and disinflation are upper most in policymaker minds – here and abroad.

It is almost as if some analysts had forgotten that the mining construction boom had progressed to the mining production boom. Exports hit record highs in the March quarter and further gains lie ahead.

Monetary policy is about the future not the past. You can point to all of these cyclical pulses and cheer, or you can sober up and look at what matters, the rapid deterioration in Australia’s structural settings with the terms of trade driving historic income falls rendering domestic demand so chronically weak that inflation is tumbling halfway through the greatest capex smash in modern Australian history as mining, building and the car industry all slide from H2.

The only thing that the RBA got wrong was waiting so long to cut to get the dollar down. It should cut again in a hurry and keep cutting, all the way to 1% as soon as possible.

APRA should be tightening macroprudential further right now and more so as the RBA cuts.