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PROFESSIONALSAUSTRALIAEconomic Update February 2015

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PROFESSIONALS AUSTRALIA - ECONOMIC UPDATE FEBRUARY 2015THE ECONOMYThe Australian economy expanded by 2.5% over the past year¹, according to the latest seasonally adjusted ABS data. The rise, while at the lower end of the target, demonstrates the resilience of the economy despite declining commodity prices. While GDP growth remained relatively solid, optimism was tempered slightly by modest inflation data, recording a rise of 1.7% over the past year. This growth, while at the low end of the RBA target level, represents a slight improvement on the previous quarter, which may signal some positive effects of record low interest rates.

The RBA kept the official cash rate on hold in February, at a record low of 2.00%. Inflation figures, while relatively low historically, remain within the lower threshold of the RBA guidance, providing some justification for a ‘wait and see’ approach. While many businesses would welcome a cut in interest rates, the current lows provide very affordable credit for investors and businesses alike, encouraging growth and stimulating consumer spending. However, most economists still forecast a further cut in interest rates later in the year unless growth pick up.

CONSTRUCTIONThe latest building activity data provided some positives, with the value of work completed rising strongly by 5.5% overall over the past year². The data points to residential building as the main driver of growth (11.1%) with record low interest rates reducing the cost of capital and encouraging investment. While individuals have been quick to embrace cheap lending, businesses have been more cautious. As a result, non-residential construction eased slightly over the past year, down 2.3%.

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FIGURE 1: VALUE OF WORK BUILDING WORK DONE – PUBLIC SECTOR VS PRIVATE SECTOR

¹ ABS Catalogue 5206.0 - Australian National Accounts: National Income, Expenditure and Product, Sep 2015 ² ABS Catalogue 8752.0 - Building Activity, Australia, Sep 2015

Source: ABS Catalogue 8752.0 - Building Activity, Australia, Dec 2015

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FIGURE 2: VALUE OF WORK DONE - FOR AND BY PUBLIC SECTOR

Source: ABS Catalogue 8752.0

³ ABS Catalogue 8762.0 – Engineering Construction Activity, Australia, Dec 2015

Weaker public sector spending has also placed some strain on non-residential building activity. The value of work done for and by the public sector declined by 8.6% over the past year . This data points to the public sector as the major market restraining growth in building activity. Efforts to balance budgets and cut spending are largely responsible for slower public sector investment. However, weak spending is unlikely to be sustained, as government agencies including Infrastructure Australia are championing the need for greater investment in infrastructure and increased surety in a well-planned infrastructure pipeline.

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⁴ABS Catalogue 6291.0 Labour Force, Australia ⁵ Westpac-Melbourne Institute Index of Consumer Sentiment – January 2016 ⁶ NAB Monthly Business Survey – December 2015

FIGURE 1: VALUE OF WORK BUILDING WORK DONE – PUBLIC SECTOR VS PRIVATE SECTOR

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JOB MARKET

In a positive sign for the economy, the unemployment rate has declined consistently over the past year. The trend unemployment rate fell further in December to 5.8%, well below the rate of 6.2% reached in December 2014 . As a result, the current unemployment rate is the lowest since November 2013. However, while the job market appears to be steadying, there is still significant room for improvement, with the unemployment rate still well above the average of the past decade of 5.2%. This rate falls largely in line with full employment levels, and the market cannot typically sustain lower unemployment for lengthy periods.

Over the past year, the labour market in industries that employ technical professionals have fluctuated. Mining and manufacturing industries performed the weakest, with employment levels in these industries declining, while construction remained flat. Professional and technical services and ICT industries performed much better, with their respective labour forces expanding by 7.3% and 4.7%.

Source: ABS Catalogue 6202.0

Uncertainty

The New Year began under a cloud of uncertainty, with sharp declines in commodity prices, rapidly falling oil prices, slowing growth from China and tumbling equity markets all receiving significant media attention. These gloomy economic signs have discouraged consumers, with sentiment levels falling in January. However, these factors are unlikely to negatively affect the day to day life of most consumers, with low oil prices positively affecting the disposable income of most Australians.

The Westpac-Melbourne Institute Index of Consumer Sentiment recorded a decline in sentiment in January, from 100.8 to 97.3⁵, signifying that a greater number of consumers feel negatively about their future economic prospects. However, the index remains 4.3% higher than it was one year ago, signalling that while consumers remain cautious some improvements have occurred over the past year.

While consumer sentiment was spooked by economic uncertainty, businesses remained more upbeat about their prospects and conditions. The latest NAB Monthly Business Survey pointed to a slight easing in business confidence during December, however the index remains positive at 3. Business conditions also eased mildly while remaining strong at 7⁶. The survey provided no signs of any fundamental decline in business conditions. Business confidence in construction and manufacturing industries recorded strong results, with both remaining in positive territory.

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