Construction Indicates Cause for Concern

The RBA in its quarterly policy statement released last week shared some of their thoughts with us all. Would you believe they are downgrading both their growth and inflation forecasts, but are still quibbling about dropping interest rates. GDP expectations for next year are just 2.25%, and I expect that is rather hopeful, with inflation expected to be at the bottom of the band at 2.0%.

Australian construction PMI for October is barely in expansionary mode, but it is the breakdown that is interesting. Unit construction is very strong, while house construction is dropping. In other words the sector that builds and now often sells off the plan directly into China, without Australians even getting a look in, is strong. This would also explain the increasing trend toward joint ventures by Australian developers with Chinese construction firms.

It’s a signpost that the RBA have been holding rates too high for too long, as is its historic norm, and together with the APRA pressure for investment lending restraint, are lowering the level of housing supply for the Australian market. Conversely, it allows the Chinese buyer easier, less competitive, entry.

This construction PMI figure is a major reason to worry.

The upward pressure on housing affordability will only be further accelerated by the RBA and APRA approaches.

The official interest rate should already be at 1.5%! I still think the RBA will hold out for as long as it can at 2.00% - a significant error!

Overall, I remain neutral on the Australian economy as the Turnbull effect (a lift in consumer and business behaviour as a result of our having a new Prime Minister) and sustained strong commodity demand from China/Asia continue to nullify the ineptitude of our regulators.

Clifford Bennett