Australia | Mar 11 2009
By Chris Shaw
Things are simply not going Australia’s way these days. Even when economic data show some improvement they still fall short of market estimates. Take today’s 3.5% increase in housing finance for January as an example. The release marked the fourth successive monthly increase, but economists had been calling for a gain of 4.0% for the month.
As TD Securities senior strategist Joshua Williamson notes, the market has largely overlooked the fact the number was a little lower than expected given the high levels of volatility associated with the number.
In Williamson’s view the increase indicates the combination of lower interest rates and benefits for first home buyers have had some sucess in luring buyers into the market. While he expects downstream measures of housing activity to begin to improve in coming months, Williamson doesn’t expect housing on its own can rescue the Australian economy from further weakness going forward.
Westpac senior economist Andrew Hanlan agrees the data show the housing finance recovery continues to gather pace, particularly as new lending rose 5.6% for the month and new lending to owner-occupiers is now up 17% on the levels of last August. The bank expects the trend to continue helped particularly by low interest rates, though rising unemployment will act as something of a constraining factor and the investor market should remain the weaker link.
ANZ Bank economist Dr Alex Joiner regards today’s housing finance as somewhat encouraging for the economy overall, though it does show the rate cuts are working better in some sectors of the economy than others. He does see today’s release as further confirmation of the view the Australian economy is fundamentally in much better shape than many of its global peers.
That said, given further deterioration in the economy is expected, he sees scope for housing finance numbers to moderate in coming months as a weaker economy suggests buyers will remain cautious as they attempt to avoid excessive borrowing.
This is especially the case given consumer confidence for March fell a further 0.2 points to hit a level of 85.6, Joiner noting the fall reflects further increases in the unemployment rate and ongoing falls in equity markets. On the plus side he expects the second round of fiscal stimulus to provide at least a short-term boost to this measure.
In the view of Williamson, 2009 may see the ecconomy decline in all four quarters and this means a larger than expected rate cut next month. While the market is anticipating a 50-basis point cut, Williamson is forecasting a 75-basis point move as he expects tomorrow’s labour market data to be weaker than currently expected. If his view proves correct he sees scope for an unwinding of the recent rally in the Australian dollar.
According to Westpac’s Hanlan today’s data continue to support his view cash rates are headed to 2.0%, a move that would bring variable lending rates in Australia to their lowest level since 1968.