While a key financial health indicator – gross domestic product (GDP) – shows that the Australian economy grew by 0.5 per cent in the second quarter of 2019, the economic outlook is far from a picture of health.
The GDP result came in right on market forecasts, but below the Reserve Bank of Australia’s (RBA) forecasts for a 0.8 per cent rise in the quarter.
Of most concern is the yearly growth rate. At 1.4 per cent, it is the slowest annual rate of GDP growth in Australia since the Global Financial Crisis. This is why talk of a recession has increased lately, and why conditions in some pockets of the economy and Australian industries may feel recession-like.
Building approvals take a dive
One of those pockets is building approvals, which collapsed by 9.7 per cent in July as a national average. This figure came in much weaker than market expectations of no change, taking monthly approvals to their lowest level since July 2012.
The national figure was brought down by huge declines in both Victoria (-24.3 per cent) and New South Wales (-17.5 per cent). All other states all had rises in approvals.
While falling housing construction in Australia is not unexpected, given the correction in the housing market since 2017, the extremely large decline in approvals in July is concerning if approvals fall down further to historical lows.
Looking ahead, the news isn’t good, with leading indicators of construction activity suggesting that the weakness in housing construction will continue before a bottoming in early 2020. This means that residential construction could continue to be a drag on GDP growth for the next six to nine months.
Job losses and unemployment
Falling housing construction means that job losses in the construction sector will likely continue. We expect more job losses in this area will lead to a lift in the unemployment rate to around 5.5 per cent over the next few months.
The unemployment rates remains one of the key headwinds facing the Australian economy, so any increase in this rate is not good news.
House price recovery continues
On the upside, following on from July’s gains, the recovery trend in house prices carried through to August, with overall national prices up 0.8 per cent for the month. Auction clearance rates continue to increase, although stock levels remain low.
The key markets of Sydney and Melbourne performed strongly in August, up 1.6 per cent and 1.4 per cent respectively. Further, both recorded their third successive month of gains. However, to give these figures some perspective, Sydney prices still remain 13.3 per cent down from their peak, while the Melbourne market remains 9.5 per cent below peak.
Our expectation of more interest rate cuts should mean that momentum will continue to build in the housing market. However, the weaker domestic economic environment will keep a cap on home price gains. We expect home price growth to be limited to around five per cent over the next year on average across Australia.
While the risk of an Australian recession can’t be ignored, we believe further interest rate cuts, possibly quantitative easing and more fiscal stimulus should help lift growth. If the improvement in home prices continues, it will also be positive for household wealth and provide some boost to inflation.
Subscribe to Econosights to receive my latest articles.Diana Mousina, Senior Economist
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