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Mar 31, 2010

New economic data: no damn good for a government trying to frame a Budget

New economic data suggests an economy marking time -- not what the government needed to hear as it works out how heavily to slash expenditure in the Budget.

Bernard Keane — Politics Editor

Bernard Keane

Politics Editor

Today’s retail sales and housing approval data from the ABS are of precisely no help to the government as it enters the final stages of its Budget preparations.

Recent economic data has shown the transition from stimulus-supported demand to private-led demand under way as the stimulus impact starts to withdraw.  Voters concurred, with strong consumer confidence figures and much greater confidence about job security suggesting a sense that we were indeed, finally, “out of the woods”.  Business, in turn, appeared to be investing based on this confidence, rather than on actual conditions.

Another big fall in seasonally adjusted dwelling approvals in February, however, and a seasonally adjusted fall in retail sales suggests an economy that is more marking time than heading back toward to a pre-GFC boom.

The pressing question for the government, and in particularly the inner circle of Rudd, Gillard, Swan and Tanner, is how hard to curb spending in the Budget.  There’s an expectation in the business community that the Budget will return to surplus far more quickly than forecast, but Swan and Tanner have been furiously hosing down those expectations, predicting this year’s deficit won’t be much different to forecast.  But there appears to be an expectation among voters, too, that the time has come to start getting the deficit down.  The idea of a pre-election Budget has now been reversed — voters want to see evidence of fiscal discipline before they head to the polls, not endless giveaways.

But that’s the political, not the economic, reality.  If the recovery is still fragile enough that significant spending cuts could halt the transition to private demand, voters won’t cut the government any slack just because they thought cuts were a good idea at the time.  The clearer an idea the government has about exactly where the economy is in that transition, the better.

That’s why today’s data doesn’t help at all.

The consumer confidence is still there — the cafe and restaurant sector witnessed the strongest retail growth, so consumers are still willing to spend discretionary income on a restaurant meal.  But the data suggests that the confidence is outpacing conditions on the ground.  The fall in housing approvals might reflect that the ending of the first home owners’ boost is taking longer to unwind than expected, although separate data from RP Data-Rismark this morning on house prices suggested the ending of the boost and higher interest rates hadn’t slowed house price rises significantly.

Rudd and his inner sanctum will be hoping a clearer economic picture emerges in the next four weeks.  Any later than that and it will be getting too late to significantly change direction in the Budget.

Meanwhile, Glenn Dyer asks, how bout that rate rise?

Just maybe the headline, “Rate rise looms Tuesday” might be a bit too aggressive after official data today revealed sluggish retail sales and another down month for building approvals, while lending figures from the Reserve Bank confirmed the demand for loans remains steady and fairly quiet.

The market, and more and more economists, reckon that the April board meeting of the Reserve Bank will lead to another rise of 0.25% next Tuesday because of the strengthening data, especially the continuing surge in good news from the resources sector, high clearance rates for housing auctions at rising prices and a series of comments this week by governor Glenn Stevens on those housing prices and their current strength.

The NAB has lifted its forecasts, and believes we will get a rise next Tuesday,  a view shared by Macquarie Bank’s Rory Robertson earlier this week.

But the two key bits of data for consumption (retail sales) and building approvals, released this morning by the Australian Bureau of Statistics, show a less-than-buoyant level of activity.

Retail sales fell 1.4% in February, after the 1.1% rise in January and the 0.8% rise in December and building approvals fell 3.3% in the same month, to be now down for five successive months.

A feature of both sets of figures is that NSW was the worst performing state, with the largest falls in approvals and in retail sales. The Reserve Bank’s private credit figures for housing, personal and business lending were all steady on January: total credit rose 0.4%, as it did the month before and housing was up 0.7%, as it was the month before.

The annual rate of growth for the 12 months to February grew slightly to 1.6%  from 1.3% in January, which is nothing to get wild about. It’s about what the RBA has been expecting, from comments in recent speeches by senior officials.

Some of the commentary has focused on Stevens’ comments on the Sunrise program on the Seven Network, but much of what he has been saying has been prospective; about what might happen in the future if there’s not a cooling in prices and demand.

And yet, the slide in building approvals for a fifth successive month, would indicate there is a slowing in demand, which is good and bad news. The bad is the more interesting in the current context because the slowing in approvals it will reduce the supply of new housing units and force prospective buyers into the market for existing homes and units, which are in short supply.

The ABS said the number of dwellings approved fell in NSW by 14.6%, Victoria 1.9% and South Australia 23.3%. There was a fall in the number of approvals for private sector houses (-0.9%) this month following increases in January 2010 and December 2009. NSW saw a fall of 10.4%, Victoria 0.5%, Queensland -0.7% and South Australia 5.9%.

The value of total building approved fell 4.5% in February. The value of total residential building approvals rose 1.2% while non-residential building approvals fell 13.0%.

Retail sales fell across the board, with only cafes and restaurants and takeaway food showing an increase for yet another month, this time a solid 1.8%. The ABS said sales fell 3.9% in department stores, and in clothing, footwear & other personal accessory retailing; food retailing (down 1.7%), household goods retailing (down 1.3%) and there was a fall of 0.8% in other retailing. Sales rose in cafes, restaurants and takeaway food Services (1.8%).

NSW (-2.5%) recorded the biggest decline in sales in February, with a fall of 2.5%; followed by South Australia (down 1.7%), WA (off 1.4%), Victoria (down 0.9%), The ACT down 0.9%; Queensland (down 0.8%). Sales in Tasmania (1.5%) and the Northern Territory (0.8%) rose in February 2010.

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One thought on “New economic data: no damn good for a government trying to frame a Budget

  1. Meski

    The market’s ability to predict the RBAs'[1] actions hasn’t been good of late.

    [1] combination of a possessive applied to an acronym – I think the apostrophe goes after.