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.
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.
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.
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.