Trade surplus soars to new highs.
Services sector expands. SUV sales lift.
Services sector gauges; New vehicle sales; International trade
Foreign trade: The trade surplus fell to $5.93 billion in August from $7.25 billion in July. Australia has recorded 20 successive monthly trade surpluses. The rolling annual surplus was a record $58.59 billion in the year to August. Exports to China have hit new highs.
New highs: Over the year to August, exports hit new highs in Victoria, Queensland, Western Australia and the Northern Territory.
Services sector: The Australian Industry Group (AiG) Performance of Services Index (PSI) rose from 51.4 points to 51.5 points in September. The CBA/Markit Services Purchasing Managers’ Index (PMI) rose from 49.1 points to 52.4 points. A reading above 50 indicates an expansion of services sector activity.
New vehicle sales: In September, 88,181 new vehicles were sold, down by 6.9 per cent over the year. In the twelve months to September, sales totalled 1,083,570 units, down 8.2 per cent on a year ago and the biggest annual decline in almost a decade (November 2009).
The services sector gauge highlights conditions in the sector as well as providing guidance on the economy more generally. The vehicle sales data provides guidance on consumer spending as well as conditions for the Autos and Components sector of the sharemarket.
What does it all mean?
• Over the past year Australia posted a record trade surplus of almost $60 billion. And it is clear that our relationship with China explains much of the strong result. Exports to China continue to soar to fresh highs, so much so that over 37 per cent of all our exports are destined for mainland China. Add in Hong Kong and the export share lifts to 40 per cent.
• It is clear that Australia has a vested interest in wanting the Chinese economy to do well. But we are also posting near record exports with the US. The US-China trade war isn’t hurting Australia but clearly we would be hoping for some resolution of the trade stoush when talks are held late next week.
• The services sector accounts for around 60 per cent of the economy. So the increases in the two key activity gauges for the sector line up with Reserve Bank rhetoric about a gentle turning point being achieved for the Australian economy.
• There are signs of a bottoming in the new vehicle market. Sales of sports utility vehicles are up on a year ago. And the 6.9 per cent fall in overall vehicle sales was the second ‘best’ result in 11 months. The stabilisation of home prices across the nation would be providing confidence for new vehicle buyers.
What do the figures show?
New vehicle sales
• The Federal Chamber of Automotive Industries reported: “The September 2019 market of 88,181 new vehicle sales is a decrease of 6,530 vehicle sales or -6.9 per cent on September 2018 (94,711) vehicle sales. September 2019 had the same number of selling days (24.6) as September 2018 and this resulted in a decrease of 265.4 vehicle sales per day.”
• “The Passenger Vehicle Market is down by 5,594 vehicle sales (-18.3 per cent) over the same month last year; the Sports Utility Market is up by 441 vehicle sales (1.1 per cent); the Light Commercial Market is down by 1,041 vehicle sales (-5.4 per cent); and the Heavy Commercial Vehicle Market is down by 336 vehicle sales (-9.6 per cent) versus September 2018..
• Sales across states and territories over year to September: NSW (down 10.6 per cent); Victoria (down 7.6 per cent); Queensland (down 4.1 per cent); South Australia (up 16.2 per cent); Western Australia (down 6.5 per cent); Tasmania (down 21.6 per cent); Northern Territory (down 21.6 per cent); ACT (down 10.0 per cent).
• The biggest selling vehicle in August was the Toyota Hi-Lux (3,364) from Ford Ranger (3,116) and Mitsubishi Triton (3,001).
• The 1.1 per cent annual increase in sales of SUVs was only the second annual gain recorded in 11 months.
• The rolling annual total of new vehicle sales in August was 1,083,570, down 8.2 per cent on the year – the biggest annual decline in almost a decade (year to November 2009).
Services Purchasing managers’ indexes
• “The Australian Industry Group Australian Performance of Services Index (Australian PSI®) rose by 0.1 points to 51.5 points in September 2019 (seasonally adjusted). It was the second month of mildly positive conditions following a weak month in July, as trading conditions for some businesses returned to similar levels seen earlier in the year. Results above 50 points indicate expansion in the Australian PSI®, with higher numbers indicating stronger rates of growth.
• The Australian PSI® indicated expansion in three of the eight services sectors in September (trend). Among the business oriented sectors, only finance & insurance reported positive results. Among the consumer-oriented segments, the ‘health, education & community services’ sector was strongest and the hospitality sector was mildly positive. Two activity indicators in the Australian PSI® were positive and indicating growth in September; new orders picked up and supplier deliveries also rose. Sales remain contractionary and employment was flat.”
• The Commonwealth Bank/Markit Services Purchasing Managers’ Index (PMI) rose from 49.1 points to 52.4 points in September – the fourth reading above 50 in five months. Readings above 50 signify expansion.
• “Strengthening demand conditions, both abroad and at home, contributed to business activity returning to growth in September. Overall new business intakes rose at the fastest rate for three months, supported by rising service exports.”
• “Sales growth was linked to increased marketing activities and low interest rates while a weaker Australian dollar also boosted overseas orders, according to anecdotal evidence. Higher inflows of new business also led to a further rise in backlogs of work.”
International trade – August
• The trade surplus fell to $5.93 billion in August from $7.25 billion in July. Australia has recorded 20 successive monthly trade surpluses.
• The rolling annual surplus was a record $58.59 billion in the year to August. .
• Exports of goods and services fell by 3.4 per cent (exports of goods fell by 4.5 per cent).
• Imports of goods and services fell by 0.4 per cent (goods imports fell by 1.1 per cent).
• Exports were up by 10.1 per cent on a year ago, while imports were up by 0.2 per cent.
• Rural exports rose by 1.4 per cent in August. “Other” rural goods rose by 3 per cent with meat up 5 per cent. But wool exports fell 29 per cent.
• Exports of non-rural goods fell by 3.5 per cent. Exports of metal ores and minerals (excluding gold) fell by 10 per cent and coal was down by 4 per cent. Gold exports fell 22 per cent. But mineral fuels rose by 10 per cent with metals (excluding gold) up 20 per cent.
• Within imports, consumer imports fell by 0.9 per cent, capital goods imports fell by 1.9 per cent and intermediate goods imports fell by 3.8 per cent.
• Consumption goods imports were up by 0.7 per cent on a year ago, capital goods imports fell by 11.9 per cent while intermediate goods imports were down by 1.7 per cent.
• The net services deficit increased from $93 million to $204 million.
• Australia’s annual exports to China rose from $138.0 billion in July to a new record high of $141.35 billion. Exports to China are up 30.3 per cent on a year ago. Exports to China account for 37.1 per cent of Australia’s total exports – a new record high.
• Australia’s annual imports from China eased from a record-high of $78.49 billion in July to $78.13 billion in August. Annual imports were up by 11.8 per cent on a year ago. Imports from China accounted for 25.44 per cent of Australia’s total imports – down from a record 25.50 per cent in July.
• Australia’s rolling annual trade surplus with China rose from $59.55 billion to a record $63.23 billion in August.
• Australia exported $14.45 billion of goods to the US in the year to August, down slightly from a record $14.46 billion in the year to July. Imports from the US totalled a record $33 billion in the year to August.
What is the importance of the economic data?
• 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.
• CBA and the Australian Industry Group (AiG) release surveys on the services sector each month. The Australian surveys are the local equivalents of similar surveys released for other countries. The services sector surveys are useful, not just in showing how the sector is performing, but in providing some sense about where it is headed. The key ‘forward looking’ components are orders and employment.
• The monthly International Trade in Goods and Services release from the Bureau of Statistics provides estimates on exports and imports of physical goods (such as coal, beef and computers) and services (such as travel receipts). The balance of goods and services (BOGS) is a narrower description of Australia’s external position than the current account estimates. The import data is a useful gauge of consumer and business spending while exports reflect global demand as well as domestic influences such as drought.
What are the implications for interest rates and investors?
• The Reserve Bank remains prepared to cut rates again if necessary. But it will first need to see if the three quick-fire rate cuts are working. Early evidence is positive. The services sector is expanding, home prices are rising and consumer confidence is up. But it is still early days.
• Australia’s export-oriented sectors are ‘weathering the storm’, despite being caught between our largest trading partner and most important defence ally. But deteriorating global growth presents a downside risk to our external sector.
• Australia, in particular, remains highly exposed to a downturn in the Chinese economy. China takes a record 37 per cent of our exports. And imports from China are also near record highs – accounting for more than a quarter of all our imports. At some point Australia’s share of exports and imports with China will peak.
• The instability in Hong Kong is taking a toll on Australia-Hong Kong trade. Exports to Hong Kong are falling at a near 40 per cent annual rate with imports from Hong Kong falling at a slightly higher annual rate. Some trade flows may have shifted to the mainland in recent months, boosting Australia-China trade.
• Australia is exporting its socks off. And it is not just Western Australia and the Northern Territory. Exports from Queensland and Victoria were at record levels in the past year. More revenue equals bigger returns for shareholders and employees, potentially boosting spending and jobs across the economy.
• In the space of a year, Australia has generated almost $60 billion of extra income, translating to almost $2,300 for every Aussie.
• The Commonwealth Bank Group economists expect a rate cut in February 2020.
Published by Craig James, Chief Economist, CommSec