A Weak Economic Start For Australia In 2009

The start of the new year has not provided any silver lining to the economic cloud over Australia. Both building approval and trade surplus data released today were weaker than the market had expected.

Building approvals for November declined 12.8% against a market forecast of a fall of just 1.5%. ANZ Bank economist Alex Joiner noted it was the largest monthly fall since November 2002. As TD Securities senior strategist Joshua Williamson points out, it was also the fifth successive month of decline for the figure, with building approvals now down 35% from the level of a year ago.

Williamson suggests the fall means residential construction activity will act as a drag on Australian economic growth, especially early in 2009. It also suggests unemployment will trend higher given the large number of workers employed in the sector.

Joiner agrees, as he notes the market had considered the housing shortfall likely meant there would be no collapse in construction activity levels. However, today’s data release suggests there is in fact the risk of this occurring. According to Westpac, this weakness in the sector is not fully factored into growth forecasts. Again, this is a view shared by Joiner, who cautions his GDP estimates may yet be revised lower.

Add in the fact Australia’s trade surplus was narrower than expected thanks to a weaker contribution from resource exports and the outlook remains for ongoing economic weakness. This is particularly so as resource exports reflected softer volumes rather than lower prices. As Joiner notes, the latter is still to flow through, particularly as bulk commodity contract prices are to be finalised in coming months.

In Williamson’s, view the Reserve Bank of Australia (RBA) will continue to look very closely at upcoming data as they show the overall economy remains weak. This means interest rates are likely to come down further. He predicts a cut of 0.75% when the RBA next meets in February, though he suggests the risk is of an even larger move. ANZ, in contrast, is predicting a 0.5% cut next month, with the cash rate anticipated to hit 3.0% by the middle of the year.