With reactions to the latest round of official GDP data focused more on gloom than boom, it would have been easy to miss the green shoots coming through in three recent Ai Group surveys and in other real-time activity data.
These green shoots are crucial: not only do they underscore the diversity and adaptability of Australian businesses, but they suggest the hard-pressed non-mining parts of our economy are finally awakening. Importantly, this more positive outlook is coming to us directly from the latest information available – for the months of July and August – rather than from the ABS estimate of Q2 GDP (released last week and generating much gloom), which is an already dated estimate of past activity, important as it is.
In Ai Group’s most recent surveys of real-time business activity – The Australian Performance of Manufacturing Index (Australian PMI®); The Australian Performance of Services Index (Australian PSI®); and The Australian Performance of Construction Index (Australian PCI®) – August 2015 marked the first expansion in the construction industry in ten months (53.8 points, with 50 points marking the cut-off between expansion and contraction), together with a second month of expansion in manufacturing (51.7 points) and a third month of expansion in the services sector (55.6 points).
Indeed, August marks the first month since April 2010 when the Australian PMI®, PSI® and PCI® have all expanded at the same time. This winning trifecta indicates some early but very positive trends in the local economy as we move more solidly into 2015-16.
Adding further weight to this positive trend, the NAB monthly business survey also recorded stronger conditions for non-mining businesses in August (up 5 points to 11 points, with zero marking the cut-off between expansion and contraction). The NAB survey indicated improvement and net positive readings across trading conditions, profitability, and capacity utilisation, suggesting that businesses have started the 2015-16 financial year on a stronger footing.
A more positive outlook for 2015-16 is also evident in the latest ANZ count of all Australian job advertisements (online and in newspapers), which rebounded by 1.0% in August and is now 8.7% higher than a year ago (but below its peaks in 2008 and 2011).
So what gives? Why this sudden change for the better?
- Firstly, the economy is slowly but surely shifting away from its recent reliance on mining profits and investment, just as we always knew it eventually would. This process is now being helped along by the lower dollar. Lower commodity prices mean a lower Australian dollar which means better news for exporters and for those competing against imports. The Australian dollar is living up to its reputation as our “great automatic stabiliser” this year, by supporting exports and import-replacement. This trend is visible across a range of key industries, including food and beverages manufacturing, building materials, tourism and education services. Inbound tourism numbers, for example, are already rising, while our (much higher) outbound tourism numbers are stabilising, which helps direct more discretionary spending towards Australian businesses. On the downside, imported inputs are more expensive, but this is being outweighed by the benefits we are seeing from the lower dollar in the Australian PMI® and Australian PSI®.
- Second, a stronger local housing market is strengthening demand for a host of local supply chain industries. Recent building approvals data are indicating further strength in residential building activity, while commercial construction also appears to be slowly recovering. Most of the benefits from this come from the real increases we are seeing in house construction activity. But a range of industries that depend on ‘discretionary’ spending such as retail, hospitality and entertainment also seem to be benefiting from the ‘wealth effect’ generated by higher dwelling prices in urban areas.
These welcome ‘green shoots’ in July and August come after an especially slow June quarter (Q2). The ABS estimates that real GDP grew by just 0.2% in Q2 of 2015, its slowest quarterly rate since 2011. The annual growth rate of 2.0% over the year to June was the slowest since 2013. Much of this headline weakness was due to falls in resources prices, mining production and exports in Q2, including falls in output due to weather-related interruptions. So to some extent, this poor result may have been a one-off.
The more worrying story in the Q2 GDP data was the effect of changing resources prices on our national incomes. Weak growth in wages and profits, plus a further fall in the terms of trade, meant that Australian incomes went backwards in real terms in Q2, despite a nascent recovery in some of our key non-mining sectors. This decline in real national income is of serious concern, as it represents a real and potentially long-lasting fall in our national spending capacity and in our living standards.
Performance was highly variable across the states in Q2 and largely reflected the fortunes of the mining cycle. NSW, Victoria and even Tasmania out-performed the resources-heavy states of Western Australia and Queensland.
Looking ahead, the further expansion in the services sector in August, the consolidation in manufacturing conditions and an overdue expansion in construction activity all suggest that the economy has strengthened somewhat since that disappointing GDP result for June. Helped along by the lower dollar, we are finally finding sources of growth to balance out the downside of the mining-investment-boom. 2015-16 is clearly going to be another challenging year for Australian business, but the glimmers of growth are already there. These new shoots are still tender. They will need to be carefully watched and nurtured from here.
What is your feeling out there in industry? Are you sensing a break in the gloom? Share your thoughts below.