The Australian Economy and Housing Market Update May 2014

The Month in Review – May 2014

The Australian Economy and Housing Market Update, compiled by Mark Heinrich for Yong Real Estate

The Cash Rate (Interest Rate) is predicted to stay the same for June.

In the RBA Board meeting on the 20^th May 2014 there was little to faze the RBA into altering its intended course of leaving rates on hold for some time. The minutes from the RBA's May meeting noted that 「the Board considered that the current accommodative stance of policy was likely to be appropriate for some time yet」.

Interest rates are doing what they can to support the economy, but there was some caution in the domestic outlook which suggests that the RBA is still far from considering rate hikes. The RBA noted the recent pickup in activity but that 「overall growth in coming quarters was likely to be below trend given expected slower growth in exports, the decline in mining investment and the planned fiscal consolidation」.

While the 「stability in interest rates」 has been dropped and replaced with 「the Board considered that the current accommodative stance of policy was likely to be appropriate for some time yet」, there was 「little change to the outlook for the global economy」 and there was 「little change in the updated forecasts for activity and inflation」.

Overall, while the RBA is content with how interest rates are supporting the economy, the elements of caution in the RBA's commentary suggests that rate hikes are still some way off.

The RBA expects that the current recovery has enough legs to warrant a rate hike at the end of the year. However, the possible impact on confidence and spending from the Federal Budget could mean that this recovery could be tempered. This risk and the lingering caution from the RBA to the outlook highlight a risk that the RBA could delay its first rate hike until early 2015.

Data yesterday is suggesting that housing activity is beginning to cool. RP Data-Rismark dwelling prices slipped 1.9% in May, the first monthly decline in a year. Annual growth was still a solid 10.7% in the year to May.

In other housing data, building approvals fell 5.6% in April, declining for the third consecutive month. Annual growth has now softened to just 1.1%, the weakest annual pace in ten months. The data is suggesting that growth in residential construction will soften heading into Q2, although they continue to point to a healthy level residential construction.

Double-digit annual growth in dwelling prices was never likely to be sustainable in coming years. The new stream of new residential building will keep a lid on house price growth, in addition to less attractive rental yields for investors and affordability constraints. However, while some moderation in growth is in prospect, we continue to expect healthy gains in dwelling prices this year. Low interest rates should continue to support demand for housing and residential construction activity over the course of this year.

Gross company operating profits rose 3.1% in the March quarter, the sixth consecutive quarterly gain. Annual growth slipped from 11.3% to 10.9% in the year to the March quarter, but remained at a healthy rate of growth. Profit growth was assisted by a weaker Australian dollar in the quarter.

In this release, inventories declined by a larger-than-expected 1.7% in the March quarter, and suggest there is some downside risk to our forecast for GDP growth of 1.1% in the March quarter and 3.4% in the year. Today we will receive the final pieces of economic data which will assist in finalizing our forecasts – net exports and government finance.

The TD-MI Inflation gauge rose 0.3% in May, taking annual inflation to 2.9% in the year to May. This measure is pointing to some risk that inflation could get close to the top of the RBA's 2 to 3 per cent per annum band. While soft wage growth and a steady Australian dollar in recent months suggest inflation should remain within the RBA's target band, elevated domestic price pressures remain a concern.

The AiG performance of manufacturing index rose from 44.8 to 49.2 in May. Although the index remains below 50, signaling contraction, it was the highest reading in seven months.

Source: St George Bank and RPData - Rismark

Please click on the links below to see the full reports on The 2014 Budget and the Housing Market for May 2014 and 「Check Out」our monthly explanation of 「Commonly Used」Economic Terms to help you better understand economic reports.