The Economy: Now for Jobs

Sydney, Aug 7, 2008 (ABN Newswire) - Yesterday poor housing finance figures added to the downward pressure on official interest rates, so what happens with today's jobs figures for July?

The market consensus is mixed on the employment figures from the Australian Bureau of Statistics, with some economists looking for 5,000 new jobs to be created, others as few as a couple of thousand or less, while a few are looking for a small loss.

If we do get a loss it will be the second in three months and will go a little way to confirming the slowing evolving trend of a slowing in jobs growth in response to the slowing of activity in the retail and building sectors.

We do know that the jobs figures can be lumpy (viz May's 25,000-plus loss and June 29,800 gain) but from month this year, the employment market is softening.

Only only 44,000 new jobs were added in the June quarter, compared with the average of 74,000 over the previous eight quarters.

With recent job cut announcements at South Pacific Tyres, Holden in Melbourne, Qantas, Starbucks and Don Smallgoods, the news media is starting to be filled with more reports of corporate cost cutting and restructuring.

Corporate margins are under pressure from higher oil prices and interest rates and because it takes a longer time for momentum to develop in the labour market as employers try to hang on to employees (especially given the absence of well trained replacements), its likely we won't see a significant increase in unemployment for a couple more months.

So with rate cut mania now possessing the market's collective brain, yesterday's housing finance figures are not as dramatic as the building approvals and retail sales numbers for June last week.

But home-loan approvals fell more than expected in June thanks to those high rates, oil prices and weak consumer confidence.

The number of home loans, seasonally adjusted, dropped 3.7% in June from May, according to the Australian Bureau of Statistics figures.

The total value of dwelling finance commitments excluding alterations and additions fell 0.9% in June, compared to May in seasonally adjusted terms.

The ABS said owner occupied housing commitments fell 1.1% and investment housing commitments were 0.3% lower.

Compared to the car industry which continues to show some growth, despite high interest rates and oil and petrol prices, the collapse in the housing sector is astonishing.

The one thing you could say about the housing sector, that its now at recession levels, so the bottom is probably closer than some think.

The ABS said the total value of owner occupied housing commitments (seasonally adjusted) fell 1.1% (down $141m) in June 2008, following a revised decrease of 5.2% in May 2008.

"The decrease this month was due to falls in the purchase of established dwellings excluding refinancing (down $95m, 1.3%), refinancing of established dwellings (down $83m, 2.2%), and construction of dwellings (down $27m, 2.5%), while the purchase of new dwellings rose (up $64m, 14.3%).

"The total value of investment housing commitments (seasonally adjusted) decreased 0.3% (down $15m) in June 2008 compared with May 2008, following a revised decrease of 6.1% in May 2008.

"The decrease this month was due to a fall in the construction of dwellings for rent or resale (down $102m, 15.2%), while rises were recorded for the purchase of dwellings by others for rent or resale (up $79m, 13.3%) and the purchase of dwellings by individuals for rent or resale (up $9m, 0.2%)."

The jobs figures for July will also give us a first glimpse of what conditions were like in the economy in July and the start of the third quarter.

We now know that June was tough in retail and the building industry, and rough on consumer confidence, but not on the car industry where sales (and local production) are proving to be remarkably resilient.

But while there's an emerging consensus that the Reserve Bank will not only cut interest rates after its September 2 meeting, but cut by 0.50%, I'd still be watching the weakening Australian dollar.

As world oil prices have sunk under $US120 a barrel since July 11's peak of $US147.27, the Aussie dollar has fallen from its peak of just over 98 US cents to a soft 91.50 yesterday (and just under 92 US cents last night).

All thoughts of parity by Christmas have and along with that some of the gains from the sinking oil price are also disappearing as the Aussie dollar falls.

That will clip a small part of the flow through to local petrol prices over the next week.

There could be a very real chance that as oil falls further and drags other commodity prices down as well, the falling value of the Aussie dollar could start adding an unwanted inflationary overlay to the economy.

The Aussie's fall will be accelerated by the RBA's rate cuts, so at some stage hopes for rate cuts of up to 1.25% could be truncated, if the currency falls too quickly under 90 US cents.

But we will get a rate cut next month and there's every chance it could be half a per cent to start, with the bank then sitting and waiting until November or December, especially if the dollar drops well under 90 US cents as a result.

A cut that large would have the added benefit of putting enormous pressure on the banks to give back some of their extra rate rises.

Some analysts question whether the banks will move, arguing their funding costs remain elevated, but the key bank bill swap rate in Australia has moved down sharply in the past month with the 90 day rate falling 0.20% and the 5-year falling 0.54% since the first week of July.

(If another US bank was to stumble, those rates would again firm, but absent that, there's a clear downward trend established and little reason for the banks not to start cutting rates, if the RBA cuts by 0.50%).

The banks have loaded between 0.50% and around 0.60% on top of what the 1% in cuts the bank has made in the past year (Remember it started its latest round of rises a year ago this week), so with that falling trend in the market, they could cut.

The National Australia Bank's Alan Oster said that after the RBA statement "we now expect the RBA to cut rates by at least 50bp by the end of 2008" and 1.25% by the end of 2009.

"Over the past month we have become worried about how quickly the evidence of the slowdown has been accumulating and how broadly the slowdown has become evident across the range of economic indicators.

Not the least of these has been the sharp deterioration in Business Conditions and plummeting Business Confidence, as revealed in our June Quarter Business Survey released last week.

"The timing of the first cut remains uncertain but it could be as early as the next RBA Board meeting on 2 September," Mr Oster said.

Goldman Sachs JBWere wrote: 

The RBA's move to an easing bias is now explicit. The downward trajectory of the credit and demand indicators has clearly prompted the RBA to sharply shift tack.

Once the RBA moves to such an explicit easing bias it rarely keeps the market waiting. We now expect the RBA to ease 25bp in September and to follow through with a second cut of 25bp by December. Speculation will now swing to the possibility of a 50bp cut in September.

It is worth noting that in each of the easing cycles since 1990 the RBA has commenced the cycle with at least a 50bp cut. • We expect additional rate cuts at the February 2009, August 2009 and November 2009 for a total of 125bp of easing by December 2009."

The commencement of a rate cutting cycle in September is significantly earlier in the economic cycle compared to the commencement of the previous 2 RBA rate cutting periods.

A case can be made that more than 125bp of rate cuts will be required to return policy to levels consistent with respectable, yet still sub-trend, rates of economic growth through 2009.

There are 3 important reasons to believe that more significant interest rate reductions may be required than the 125bp we have outlined. - House prices are still vulnerable to declines in coming quarters and the deleveraging process is unlikely to be reversed upon a gradual easing of monetary policy.

- Commodity price trends suggest that the peak in Australia's terms of trade may well be at hand, suggesting a reversal of stimuli that has bolstered domestic demand and profits over the past 5 years.

- The cyclical recovery by consumption from lower interest rates may well disappoint. It is important to remember that it is real interest rates that matter for consumption growth.

In our consumption model a 25bpt decrease in real cash rates results in a 0.21% rise in consumption within a 6-month period. However, even if the RBA cuts by 125bp by the end of 2009 this will merely leave real cash rates around current levels.

• Despite the dramatic shift in interest rate expectations over the past week, including some sizeable shifts in our own forecasts, the market may still be underestimating just how many interest rate cuts will be required to stabilise an economy going cold-turkey after a decade-long addiction to debt."

Merrill Lynch told clients that: 

We now expect that excessively tight financial conditions will force the RBA to commence easing monetary policy sooner rather than later.

We expect the RBA to cut rates by 25bp at both the September and November meetings, with a further 50bp of easing forecast over the first half of 2009. Previously we expected the easing cycle would commence in Q209.

The RBA signalled a clear shift to an easing bias in its Statement accompanying the August Monetary Policy Board meeting.

And UBS said in its note: 

We now expect a 25bp cut in September 2008, and again in November as the Q3 inflation prints favourably (UBS estimate: 0.6% & 0.8% for core).

This would be a more cautious start than previous rate cycles, which we believe reflects greater current inflation pressures and the likely positive stimulus from the terms of trade & recent tax cuts, but acknowledges the risks to the economy emerging in the quickly weakening consumer and housing sectors."


 

AIR publishes a weekly magazine. Subscriptions are free at http://www.aireview.com.au