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Renovation approvals fall most in 3 years

Weakest new vehicle sales in 11 years
Building Approvals; New vehicle sales; Services & Construction gauges; RBA speech

Building approvals: Council approvals to build new homes fell by 1.8 per cent in April (consensus: -10.7 per cent) after falling 2.6 per cent in March. But approvals are up 5.7 per cent from a year ago. The total value of alterations & additions approvals were down by 13.2 per cent in April – the most in 3 years.

New vehicle sales: In May, 59,894 new vehicles were sold, down by 35.3 per cent over the year. The rolling annual total of new vehicle sales in May was 958,399 – down 14 per cent on the year – the weakest annual growth rate in almost 11 years. And the May sales result was the weakest for a May month since 1991.

Services sector: The ‘final’ CBA/IHS Markit Services Purchasing Managers’ Index (PMI) rose to 26.9 points in May from a record low of 19.5 points in April (since May 2016). Any reading below 50 indicates a contraction in activity.

Construction sector: The AiGroup Performance of Construction Index (PCI) rose from a record low of 21.6 points in April (lowest since September 2005) to 24.9 points in May. Readings below 50 indicate a contraction of activity.

Reserve Bank speech: Reserve Bank Assistant Governor Michele Bullock spoke on “Panic, Pandemic and Payment Preferences” online this morning. Ms. Bullock said, “Some of the sharp and sudden shift to contactless and mobile payments, and away from cash is likely to be permanent”. And, “One option that is actively being considered by the industry is closure of the cheque system.”

The approvals data has implications for banks, retailers, developers, building and building material companies. The vehicle sales data provides guidance on consumer spending as well as conditions for the Autos and Components sector of the sharemarket. The services purchasing managers index provides guidance on conditions in retailing, financial services and the services sector more broadly. The Performance of Construction index provides insights for business conditions in the sector.

What does it all mean?

• With Australia’s enviable three decade run without a recession now all but over, policymaker attention should remain focused on supporting Aussie workers and business owners through the worst economic contraction since the Great Depression. Australia’s fragile labour market – along with confidence – is key to the post-virus recovery, so turning-off the fiscal taps too early could prolong the pandemic’s pain.

• And that economic pain is no more evident than in the construction industry. The AiGroup’s construction gauge has lifted off record lows but activity has contracted for 21 consecutive quarters. The residential building industry has been in a prolonged downturn for almost two years and the economic downturn could limit new construction, leading to shortages of new homes once population growth eventually picks up after the initial fall in immigration. Already surveys conducted by Master Builders show a 40 per cent drop in forward contracts for both residential and commercial buildings.

• In a worrying sign about a potential ‘insolvency cliff’, AiGroup reported, “The national JobKeeper scheme was mentioned by several participants as the only thing keeping their business and workforce together in May.” And just last week Reserve Governor Philip Lowe said, “Many businesses, particularly in construction and professional services, had a pipeline of work, so when the shutdown occurred that work could be done. But what we’re hearing through our liaison is that that pipeline is being worked off. As that pipeline gets worked off, if it is not replaced by new jobs and new contracts, we could see weakness in construction and professional services.”

• Building approvals held up surprisingly well in April despite the economic lockdown. Approvals lifted in all states and territories except NSW (-29.9 per cent) and Tasmania (flat). But with the usual lags between council applications and consents, approvals may decline in the coming months, given likely developer caution about the viability of projects.

• With approvals for alterations and additions down by 13.2 per cent in April – the most in 3 years – the timing of the Federal Government’s planned home buyer’s stimulus package couldn’t be better to safeguard around a third of the construction industry’s 1.3 million jobs. The package is expected to include grants of around $25,000 to build new homes or renovate.

• ‘Auto Alley’ continues to struggle with new car sales down for a 26th consecutive month in May – hit by a combination of consumer caution, virus restriction measures, tight lending conditions and natural disasters. The auto industry would like to see the “Instant Asset Write Off” initiative extended beyond the end of June to help steer dealerships through the coronavirus crisis.

What do the figures show?

Building Approvals – April 2020

• Council approvals to build new homes fell by 1.8 per cent in April (consensus: -10.7 per cent) after falling 2.6 per cent in March. But approvals are up 5.7 per cent from a year ago.

• House approvals rose by 3 per cent with private sector council consents up 2.7 per cent and public sector approvals up 34 per cent in April.

• Apartment approvals fell by 8.1 per cent with private sector consents down 8.9 per cent, but public sector approvals rose 38.4 per cent in April.

• In trend terms, overall approvals rose by 1 per cent – the eight straight monthly gain.

• Over the past year 174,719 new homes were approved, 22.4 per cent below the decade average of 197,139 units.

• Dwelling approvals across states/territories in April: NSW (-29.9 per cent); Victoria (+5.7 per cent); Queensland (+4.6 per cent); South Australia (+21 per cent); Western Australia (+12.4 per cent); Tasmania (flat). In trend terms: Northern Territory (+10 per cent); ACT (+13.2 per cent).

• The value of all commercial and residential building approvals fell by 2.5 per cent in April after falling 6.4 per cent in March. Residential approvals rose by 4.4 per cent with new building up by 7 per cent, but alterations & additions were down by 13.2 per cent – the most in 3 years. And commercial building fell by 11.9 per cent.

• Over the year to April, building approvals totalled $117.57 billion, 16.2 per cent above the decade average.

New vehicle sales – May

• In May, 59,894 new vehicles were sold, down by 35.3 per cent over the year. The rolling annual total of new vehicle sales in May was 958,399 – down 14 per cent on the year – the weakest annual growth rate in almost 11 years. The May sales result was the weakest for a May month since 1991.

• The Federal Chamber of Automotive Industries reported: “The May 2020 market of 59,894 new vehicle sales is a decrease of 32,667 vehicle sales or -35.3 per cent on May 2019 (92,561) vehicle sales. May 2020 had 25.8 selling days, compared to May 2019 with 2680, and this resulted in a decrease of 1,132.3 vehicle sales per day.”

• And, “The Passenger Vehicle Market is down by 15,054 vehicle sales (-52.1 per cent) over the same month last year; the Sports Utility Market is down by 12,285 vehicle sales (-30 per cent); the Light Commercial Market is down by 4,387 vehicle sales (-22.9 per cent); and the Heavy Commercial Vehicle Market is down by 941 vehicle sales (-26.5 per cent) versus May 2019.”

• Also, “Toyota was market leader in May, followed by Mazda and Hyundai. Toyota led Mazda with a margin of 8,805 vehicle sales and 14.7 market share points.”

• Sales across states and territories over year to May: NSW (down 34.6 per cent); Victoria (down 41.2 per cent); Queensland (down 33.1 per cent); South Australia (down 32.4 per cent); Western Australia (down 26.4 per cent); Tasmania (down 51.7 per cent); Northern Territory (down 45.8 per cent); ACT (down 5.2 per cent).

• The rolling annual total of new vehicle sales in May was 958,399, down 14 per cent on the year after falling 11.7 per cent in the year to April. Passenger car sales fell by 52.1 per cent on the year with SUVs down 30 per cent and “other vehicles” down 23.4 per cent.

• In the year to May, SUVs accounted for a record 62.8 per cent of combined SUV and passenger vehicle sales.

Services Purchasing Managers’ index – May

• The ‘final’ CBA/IHS Markit Services Purchasing Managers’ Index (PMI) rose to 26.9 points in May from a record low of 19.5 points in April (lowest since May 2016). Any reading below 50 indicates a contraction in activity.

• According to the CBA and IHS Markit, “Latest PMI® data showed business activity across the Australian service sector falling substantially further in May as ongoing measures to contain the COVID-19 pandemic continued to hit demand. However, the rate of decline in both activity and new orders eased as some restrictions were relaxed during the month. Furthermore, business confidence improved markedly due to expectations of a further easing of containment measures.”

Performance of Construction – May

• The AiGroup Performance of Construction Index (PCI) rose from a record low of 21.6 points in April (lowest since September 2005) to 24.9 points in May. Readings below 50 indicate a contraction of activity.

• By sub-component, new orders rose 7.3 points to 23 points; employment lifted 3.5 points to 29.1 points; average wages rose 3.3 points to 47 points; and construction activity was also up 3.3 points to 21.3 points; selling prices rose 2.2 points to 28.4 points. But supplier deliveries fell 4.8 points to 29.3 points and input prices were down 0.6 points to 64.7 points.

• By sector, apartment building rose by 8.7 points to 21.6 points; commercial construction rose 6.4 points to 18.1 points; house building lifted 5.4 points to 20.2 points); and engineering construction fell 2.3 points to 23.8 points.

• According to the AiGroup: “The national JobKeeper scheme was mentioned by several participants as the only thing keeping their business and workforce together in May. A handful of housing and commercial sector builders reported increased queries about home and office renovations, which they hope to see translated into concrete orders over the coming months.”

• And, “COVID-19 restrictions are affecting the production side of construction as well as Australia’s demand for new structures (which was already in decline nationally). In May, construction business operators reported that work on site is slower and less efficient due to activity restrictions, travel and delivery disruptions, distancing requirements on site and new PPE requirements. Waiting for to suitable PPE to be delivered on site had disrupted some larger sites.”

What is the importance of the economic data?

• The Bureau of Statistics’ 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 construction-related companies.

• The Federal Chamber of Automotive Industries releases estimates of new vehicle sales on the third business day of the month. The figures highlight the strength of consumer spending as well as conditions facing auto & components companies.

• The CBA Purchasing Manager indexes (PMIs) for services and manufacturing are released each month. The Australian PMIs are the local equivalents of similar indexes released for other countries. The PMIs are amongst timeliest economic indicators released in Australia. The PMIs are useful not just in showing how the sectors are performing but in providing some sense about where they are heading. The key ‘forward looking’ components are orders and employment.

• The Australian Industry Group compile the Performance of Manufacturing Index, the Performance of Services index and the Performance of Construction index each month (the latter with the Housing Industry of Australia). The Commonwealth Bank and Markit also compile purchasing manager surveys for manufacturing and services sectors. The surveys are amongst the timeliest economic indicators released in Australia. The surveys are useful not just in showing how key sectors are performing but also in providing some sense about where they are headed. The key ‘forward looking’ components are orders and employment.

What are the implications for investors?

• The March quarter, 2020 national accounts released today serve to highlight the impact of COVID-19 on the construction sector. In fact, the construction industry’s ‘gross value added’ contracted by 0.5 per cent during the quarter to be down 3.7 per cent from a year ago. While a stimulus package focusing on residential construction is supportive of workers and businesses, a broader policy initiative including social housing and commercial/non-residential building (i.e. tourism and recreational facilities, renewable energy, water, aged care and school upgrades) should also be considered.

• Could cheques and cash be on the way out? Well the Reserve Bank certainly thinks so. Innovation in the payments system – including smartphone ‘tap and go’ and ‘buy now, pay later’ methods – have seen Aussies increasingly shy away from using cash and cheques to pay for goods and services. In fact, the pandemic has reduced demand for ATM cash withdrawals as retailers have opted for contactless payments on health concerns.

• While cash will be around for a while yet, the humble cheque is most certainly ‘toast’ with Reserve Bank Assistant Governor Michele Bullock conceding, “One option that is actively being considered by the industry is closure of the cheque system.” Reserve Bank analysis showed that, “In April, the value of cheque payments was more than 40 per cent lower than twelve months earlier, compared with annual rates of decline of around 20 per cent in previous months.”

Published by Ryan Felsman, Senior Economist, CommSec