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Aussie construction data point to weakness ahead

Macro 5 minutes to read
Strats-Eleanor-88x88
Eleanor Creagh

Australian Market Strategist

Summary:  The latest Australian building approvals data show that the slump that occurred ahead of February's uptick has resumed, leading to concerns about the economy's overall heath and placing central bank policy in focus.

Building approvals resumed their slump in March, reversing the uptick seen in February. Approvals have collapsed 27.3% from March of last year and slid 15.5% since last month. Building approvals are a particularly volatile data set, and highly influenced month-to-month by large apartment approvals, so examining the trend data provides a clearer picture. On this basis the outlook is still poor, however, as in trend terms approvals nationally slumped 0.6% since last month and 22.4% since this time last year.

The trend is worrying and points to weakness ahead in the construction sector. This is concerning as the sector is one of the largest employers in Australia, making up nearly 10% of jobs in Victoria and New South Wales. As residential construction activity deteriorates over the coming months, this will hit employment. Given that strength in the labour market is crucial in determining the Reserve Bank of Australia’s next policy move, it is vital to watch these leading indicators for clues on the path for monetary policy.
Aussie building approvals
The economy also lost momentum in the back half of last year. The Q3 and Q4 2018 GDP readings confirmed that the domestic economy recorded the two weakest quarters of growth since the financial crisis as weak household spending weighed on growth.

To date, the labour market has been the one bright spot of the domestic economy, with unemployment now sitting near cycle lows at 5.0%, but stagnant wage growth means most people don’t feel the benefit. Without continued tightening of the labour market and removal of slack this will continue to be the case.

The RBA is banking on employment strengthening and subsequent wage growth pressures offsetting the negative wealth effect and consequent hit to consumption due to the slump in property prices. 
Housing index
Source: Core Logic
Australian households are currently under pressure to maintain spending habits as the property market continues to deteriorate given that most are significantly overleveraged and have whittled down their savings down to around decade lows. Income growth for the average person is not enough to offset the negative wealth effect felt as house prices continue to deteriorate. For most people, their home is their biggest asset and a significant store of wealth for the average Australian household, so continued house prices declines weigh on household consumption.

House prices have continued to fall throughout the first quarter of 2019 despite the pace of declines moderating, and on that basis it doesn’t look as if a reprieve is on the horizon. Employment will not continue to hold up, as confidence is eroded and growth continues to lose momentum. The labour market remains resilient to date, but unemployment is a lagging indicator, so the data only give us a rear-mirror view and the continued slump in building approvals points to weakness ahead in employment within residential construction. 

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