Demand for cash soars at fastest rate in 11 years

Engineering projects at 5-year highs
Building Approvals; Engineering construction; Banknotes on issue

Dwelling approvals: Council approvals to build new homes fell by 16.4 per cent in May (forecast: -7.8 per cent) after falling by 2.1 per cent in April.

Engineering: Engineering work was broadly unchanged in the March quarter. The value of work yet to be done hit a 5-year high of $76 billion.

Banknotes on issue: The value of banknotes on issue rose by $2 billion (2.3 per cent) in June to $90 billion. Issuance of $50 notes is growing at the fastest pace in 11 years.

China data: The Chinese (Caixin) purchasing managers’ index rose from 50.7 to 51.2 in June (forecast 50.5).

The approvals data has implications for banks, retailers, developers, building and building material companies.

What does it all mean?

• Building approvals slid in May as budding builders shelved plans to start on new projects in the middle of the pandemic. Higher unemployment and the drying up of the number of in-bound migrants will keep a cap on new projects despite the fact that borrowing rates have never been lower.

• The good news is that the value of outstanding engineering projects stands at 5-year highs. And more infrastructure work will be added to the total in coming months.

• In times of economic uncertainty, Aussies like to have physical cash on hand. It happened in the global financial crisis and it’s happening now. Issuance of both $50 notes and $100 notes are posting the fastest annual growth in almost 11 years. The value of banknotes stands at $90 billion – equivalent to around $3,600 for every Aussie.

What do the figures show?

Building Approvals – May 2020

• Council approvals to build new homes fell by 16.4 per cent in May after falling 2.1 per cent in April. Approvals are down 11.6 per cent from a year ago.

• Over the past year 172,653 new homes were approved, 12.4 per cent below the decade average of 197,141 units.

• Over the year to May, building approvals totalled $116.3 billion, 14.4 per cent above the decade average.

Engineering work – March quarter

• In the March quarter engineering work was unchanged at $20.8 billion.

• The value of engineering work yet to be done rose from $71.1 billion to a 5-year high of $76.1 billion in the March quarter.

• The value of outstanding non-resource projects stands at a record high of $50 billion.

Banknotes on issue – June 2020

• The Reserve Bank reports that the value of banknotes on issue rose by $2 billion (2.3 per cent) in June to a record $90 billion.

• Issuance of all banknotes is up 12.6 per cent over the year with issuance of $50 notes up 14.2 per cent to $43.6 billion and issuance of $100 notes up 11.8 per cent on the year to $40.4 billion.

What is the importance of the economic data?

• The Bureau of Statistics’ (ABS) monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for r construction-related companies.

• The ABS releases detailed data on engineering construction work each quarter. The data provides insights into activity for building and construction companies, civil engineering businesses, building material suppliers and associated businesses.

What are the implications for investors?

• Infrastructure is very much ‘in’. Governments are rolling out ‘shovel ready’ projects across the nation. The question is whether the skilled labour will be there in sufficient numbers to do the work with the international borders closed.

• Hoarding of cash is happening. It has been a common reaction by Aussies to crises in the past and it is again a feature of the COVID-19 world. Eventually those dollars will come out of pillowcases and cupboards and find their way back to retailers or the bank. The issuance of cash is a good indicator to monitor for confidence levels.

Published by Craig James, Chief Economist, CommSec