Tuesday, June 02, 2009

"Glass half full - of dodgy analysis"

Stephen Koukoulas:

"It is interesting to see the debate on the performance of the Australian economy and monetary policy unfold. It is certainly the case that the market is getting caught up in the optimistic side of things, focussing on any snippet of positive news and ignoring the gloomy side or at least disparaging the bad news as being ‘out of date’. I’m sure this is how the GDP results tomorrow will be viewed (wrongly of course).

Looking at the way analysts looked at the building approvals data was enlightening. There seems to be a massive bias to look at the number of house building approvals (which were strong) and ignore non-residential building approvals (which were weak). The strong housing data were cited as a great reason to support the RBA decision to leave interest rates unchanged and to suggest the economy might be about to recover. Some are even looking for the RBA to hike rates before year end...

What was generally neglected or at least downplayed was the dismally weak non-residential building approvals which are about as important to the economy as house building (in dollar terms at least). This weakness fits with the view that CAPEX will collapse and drag the whole economy down with it.

On balance, construction is still flat to down – we are in the early stages of seeing a shift away from non-residential construction towards housing. Netting out the effects, it seems the construction industry will be weak for a while longer. Certainly the Construction PMI is pointing to ongoing decline, despite the housing recovery. The PMI has been below 50 points since March 2008, a sign the glass is less than half full, despite the excitable chatter of a housing pick up.


As we have been saying loudly for some time now – the Australian recession is very much to do with a crash in business investment. The recent CAPEX and company profits data are as bad as you could imagine and are set to get worse. The interesting thing about these data are that they are only released quarterly and are usually released with a ton of other information that can swamp their headline value. The monthly data on housing, consumer spending, sentiment and the like, are not at the core of the Australian recession but their high frequency publication present a mirage of unrelentingly positive news. Housing and consumer spending are likely to ‘hang in there’, but not slump to a point where the recession intensifies, but as mentioned, CAPEX will collapse and bring GDP down with it.

For markets, it means the AUD looks very frothy at the moment. It would not be surprising to see a good 5% correction at some stage as the market looks to what will be a bottom line of economic weakness, sharp rises in unemployment and sharp falls in inflation. For rates, the RBA will need to cut rates again soon – it will be very hard for it to sit idly by with cash rates at the highest in the industrialised when inflation slumps towards or below 1% and the unemployment has a look at 7% or even 8%.

The glass is half empty – it might just take a while for this to sink into market sentiment."