Forget business gloom, ABS revisions suggest housing on the rise

Hopes for an August interest rate cut look increasingly precarious.

Earlier in the week, the Minutes of the Reserve Bank of Australia Board’s July 2 showed the central bank was happy with its current policy settings, and gave no hint of a immediate desire to ease monetary policy further.

In fact, the RBA wants to see the effects of recent rate cuts – which it said were only starting to feed through the economy – before deciding whether more rate relief is needed.

Notwithstanding evidence of weak conditions for many businesses and a 5.5 per cent drop in housing starts early this year, there appears little need for the central bank to change its view.

The results of the National Australia Bank’s quarterly business survey show that business conditions and confidence declined in the June quarter.

This is not really surprising.

As the RBA has flagged, and as NAB Group Chief Economist Alan Oster observes, there is little sign yet that record low interest rates and the tumbling exchange rate are supporting activity.

With these positives yet to make themselves felt, there is little so far to offset the negative effects of a sharp slowdown in mining investment, soft domestic demand growth, rising unemployment and political uncertainty.

Reflecting this environment, businesses surveyed by NAB said a lack of demand was the biggest drag on their profitability – much more so than interest rates, capital and labour.

Underlining the weakness of demand, for the first time in its history the NAB survey found producer prices fell in the June quarter, by 0.2 per cent.

It means input costs are well contained, but so is pricing power.

On the positive side, there has been an improvement in investment intentions in the non-mining sector, though Oster warns it is unlikely to be sufficient to fully offset the slump in mining investment.

None of these developments would particularly surprise the RBA.

But what is a surprise is the admission by the Australian Bureau of Statistics that it has badly underestimated the recovery in housing.

In its Building Activity release on 17 July, it admitted that it had had to make “quite significant” revisions to building approvals data in recent quarters following a major internal audit of figures going back to late 2000.

To give some idea of the scale of the official statistician’s miscalculation, estimates of the total value of building activity in the December quarter 2012 have been revised up by $582.1 million (2.8 per cent), and the estimate of total value of work commenced in the same quarter has jumped almost 9 per cent higher to $1.79 billion. The number of dwelling commencements have been raised 8.4 per cent to 3326.

These are not small corrections.

These revised figures suggest that, even with the setback to starts recorded in the March quarter, the housing sector is developing momentum.

If data releases in coming weeks bear this out, the chances of a rate cut later this year – forget August – will look increasingly dim.


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