In the September edition of Two Minutes for Zagga, Stephen Koukoulas, Zagga’s Economist-in-Residence, highlighted an economy that continues to deliver unexpected surprises.
While inflation remains above the Reserve Bank of Australia’s target, several indicators of economic activity have shown considerable strength. Building approvals, household spending and business investment all continue to perform strongly.
At the same time, house prices are falling across major markets, creating what Stephen describes as a “paradoxical economy” where positive and negative trends are occurring simultaneously.
Building approvals reach a four-year high
One of the strongest areas of performance has been residential building approvals. According to Stephen, the annualised rate of dwelling approvals has climbed to approximately 220,000 dwellings, the highest level in around four years and around 38% above the low point recorded several years ago.
While it remains uncertain how many of these approvals will ultimately become completed dwellings, the increase suggests that improvements in planning, approvals and development processes may be supporting activity across the sector.
Stephen noted that this has been one of the more surprising areas of strength in the current economic environment.
Consumers continue to spend
Household spending has also remained remarkably resilient.
Australia has now recorded three consecutive months where household spending has increased by 1% or more month-on-month, a result Stephen described as particularly strong.
He suggested that older Australians with substantial superannuation balances and mortgage-free homes may be contributing to this resilience, while households managing mortgages and family expenses appear to be taking a more cautious approach.
As Stephen observed:
“Household spending remains strong, unambiguously strong.”
This strength in consumer spending is likely to remain an important consideration for the Reserve Bank when assessing future interest rate decisions.
Business investment remains a bright spot
Another notable source of economic momentum is business investment.
Stephen highlighted that business investment increased by 10.5% in real terms over the past year, with expectations pointing to further growth in the year ahead.
While data centres continue to attract significant attention and investment, they are not the only drivers of activity. Warehouses and student accommodation developments are also contributing to strong capital expenditure outcomes.
Stephen said the current investment cycle may not be as significant as the mining boom, but it is nevertheless providing meaningful support to economic growth.
House prices continue to weaken
Despite the strength elsewhere in the economy, the housing market remains under pressure.
House prices are now falling across all major cities, with Sydney and Melbourne down approximately 6% and 7% respectively from their peak levels.
Early September data suggests further declines, while auction clearance rates are no longer showing the strength seen in previous periods.
Stephen believes these indicators point to ongoing softness in housing market conditions.
Higher unemployment may also contribute to housing market weakness, as employment security remains a key factor influencing borrowing capacity and housing demand.
What it means for interest rates
Inflation continues to be a central concern for policymakers.
Stephen noted that inflation remains around 3.5%, above the Reserve Bank’s 2.5% target, and that the central bank has expressed frustration with the pace at which inflation is returning towards its preferred range.
Against this backdrop, the strength in household spending, building approvals and business investment may influence future policy decisions.
Stephen believes there is a strong probability the Reserve Bank could consider a 25-basis-point increase when it next meets, with the aim of ensuring inflation continues to moderate over time.
Looking ahead
The key takeaway this month is that Australia’s economy remains more resilient than many expected although that strength is being accompanied by falling house prices and inflation that remains above target.
These competing forces will remain central to the economic outlook and the Reserve Bank’s deliberations in the months ahead as it balances growth, inflation and housing market conditions.
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Stephen Koukoulas is Managing Director of Market Economics, having had 30 years as an economist in government, banking, financial markets and policy formulation. Stephen was Senior Economic Advisor to Prime Minister, Julia Gillard, worked in the Commonwealth Treasury and was the global head of economic research and strategy for TD Securities in London.
