Sectors Continue to Fall Across the Economy

The housing market is the rock of the Australian economy and it influences many different parts of the economy, including the services and construction sectors.

So with a falling housing market comes falls across the board…

It will come as no surprise that many sectors are down again for the quarter. The only sector up is hospitality, and that can be attributed to the many holiday’s we had in April; Easter break and Anzac Day.

The RBA also left the cash rate on hold…was it only due to the upcoming election? We’ll get back to that a bit later.

First, we’ll look at both the struggling retail and constriction sectors. Very different, but both struggling for the past year.

Let’s look at retail first.

In April we saw sales rise modestly, but that wasn’t the case for the quarter. It was still weak, with not many Australians spending their money in store.

If you look at the graph below, you can see how the sector did for the last quarter:

Graph of Australian retail sales
Source: Business Insider

According to the Australian Bureau of Statistics (ABS), who released the retail figures last week, while they were slightly up, they were still fairly weak.

In seasonally adjusted terms, sales rose by 0.3%. Which was ahead of market expectations of 0.2%.

For the month of February, there was an increase of 0.9%.

Positive March results don’t diminish concerns

Compared the year earlier, sales increased by 3.5%, which is the highest increase since October 2018.

Unsurprisingly, the reason for the lift was food.

In March, cafes, restaurants and take away businesses around the nation, plus food retailers, lifted 1.4% and 0.4% respectively. But it wasn’t food volumes that boosted this sector, instead it was price increases.

Clothes, footwear and accessories were also up by 1.2%.

Household goods increased slightly as well, to 0.2%.

These results offset the declines felt by department stores and other retailers, of 1.5% and 0.4% respectively.

Nationwide, sales were up in all but two locations; ACT and WA. ACT’s position remained the same to the month prior, while WA fell 0.7%.

For Victoria and the NT, gains were up by 0.9% in both states. For Queensland and Tasmania it was 0.6%, NSW rose by 0.2% and SA by 0.1%.

While both February and March saw increases in sales, the quarter actually fell by 0.05% in regards to retail sales volumes.

If we look at retail turnover results over the year, we can see that it only rose a meagre 1.1%, which makes this the lowest increase since the September 2011 quarter, according to Business Insider.

This result can also be linked to the slowdown in the housing market. To be fair, most economic sector results are in response to the slowing housing market in one respect or another.

The quarterly fall in volumes was led by household goods retailing at 0.6%, and department stores at 1.2%,’ the ABS said.

All in all, it’s looking quite bleak for the continuing decline for the housing market if the services sector is anything to go by, as Kaixin Owyong, Economist at the National Australia Bank stated:

Unless spending on services provides an unexpectedly strong offset, the data points to another weak quarter of total consumption, most likely below the implied 0.6% average quarterly increases needed to reach the RBA’s forecast of 2.5% annual spending growth over 2019

The data bolsters the case for a near-term rate cut and reinforces our view that the RBA will have to downgrade its outlook for growth given consumer spending makes up around 55% of GDP.’

Construction sector continues to struggle

Another sector negatively hit by the housing slowdown is the construction sector.

The sector’s activity levels for new orders are declining at a rapid pace, as shown in the March quarter, add on top of that the margin pressure intensifying.

And that means bad news for those employed or wanting to be employed by the sector as it suffered a fall in employment, which is quite ominous considering it’s the third highest employer of Australians, only behind healthcare and retail.

The Australian Industry Group’s (Ai Group) Performance of Construction Index (PCI) fell 3.0 points to 42.6 for March.

This was the equal-lowest reading since June 2013.

As you may know by now, anything below 50 for PCI means that the sector is contracting, as we can see below, the chart supports the notion of tightening conditions for the construction sector:

Performance of Construction Index from Australian Industry Group’s (Ai Group)
Source: Business Insider

As the Ai group stated:

Despite growth in engineering construction, overall levels of activity in April were adversely affected by continued declines in housing activity, commercial construction and apartment building work’.

The construction of dwelling has fallen significantly, and the outcome for the sector appears bleak at this point in time, with apartment construction falling for the 13th month in a row, and home builders for a ninth straight month. Reflecting the downfall in building approvals and new home sales, as the Ai Group stated further:

Residential building respondents cited reduced customer enquiries as well as the negative influences of tighter lending conditions, falling prices and generally weak home buyer sentiment

Reports from respondents also linked soft overall demand conditions to concerns about the slowing economy and uncertainty in the lead-up to the Federal election which had led to some hesitation among clients.’

So, will there finally be a turnaround in the near future, post-election? Probably not.

According to Peter Burn, Ai Group Head of Policy, the trends don’t look to be changing:

There are now strong signs that adverse conditions in the broader construction industry are flowing through to sections of the services and manufacturing sectors

Although engineering construction is likely to remain an area of relative strength for the industry on the back of spending on large-scale, long-term publicly funded infrastructure projects, there is little sign of any near-term improvement in overall industry conditions’.

It’s looking increasingly likely that the rest of the first half of 2019 will still see sluggish economic results, which further backs up the notion that the economy is slowing down.

In an unsurprising move, the RBA held off making any cash rate changes just before the election. But don’t be surprised if a rate cut comes once we know whether the Coalition will remain or if ALP will come into power.

Whether we like it or not, most of our economic standing is due to the housing sector, but with most sectors down, the RBA will be looking to award buyers, so savers miss out again.

Kind regards,

Alana Sumic,
Editor, Markets & Money

We believe Markets & Money is unlike any other finance newsletter. Our mission is to look at the world of investments and finance in a sceptical and contrarian way. Our editorial team looks beyond the headlines and obvious explanations to bring you what we think is really moving the market. More importantly, we’re trying to show you where the next big opportunities and  big risks could be that you might not be aware of. In Markets & Money, you’ll read about the state of the Australian housing market, the future of the commodity boom, China’s rise to an economic superpower, the fate of the US dollar, and of course, a whole lot more.

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