Uneven signs of economic recovery
Lending; Car Sales; CBA Card spending; Purchasing manager surveys
Home loans: The value of home loans rose by 6.2 per cent in June (consensus: flat). Also in June, $8.9 billion of owner occupier home loans were refinanced, down 11.9 per cent from record highs in May.
Notes on issue: The value of $50 notes in circulation has risen 20.8 per cent over the past year to $46.4 billion – the fastest pace in 11 years. The value of $100 notes has risen 14 per cent over the past year – the fastest pace in 29 years.
New vehicle sales: In July, 72,505 new vehicles were sold, down 12.8 per cent on July 2019.
Services sector: The CBA/IHS Markit Services Purchasing Managers’ Index (PMI) rose from 53.1 in June to 58.2 in July – the highest since April 2017. Any reading above 50 indicates an expansion in activity.
CBA card spending: In the week to July 31, credit & debit card spending was up 3.2 per cent on a year ago. Spending in Victoria was 5.8 per cent lower over the year.
Construction sector: The AiGroup Performance of Construction Index (PCI) rose from 35.5 points in June to 42.7 points in July. Readings below 50 indicate a contraction of activity.
Living cost indexes: In the June quarter, the cost of living for employee households fell by 2.6 per cent to be down 2.1 per cent on the year. The cost of living rose 0.4 per cent over the past year for pensioner & beneficiary households; rose 1.0 per cent for aged pensioners; and rose 1.1 per cent for self-funded retirees. The broader Consumer Price Index (CPI) fell 0.3 per cent over the year.
China data: The Caixin China Services PMI fell from 58.4 to 54.1 in July (consensus: 58). Any reading above 50 indicates an expansion in activity.
The lending figures have implications for builders, housing-reliant businesses, finance providers, retailers, and companies dependent on consumer and business spending. 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?
• There are more signs of economic recovery. But as the Reserve Bank noted yesterday, the path of recovery is uneven and bumpy. The unevenness shows up in the latest weekly spending data and housing data across states and territories – especially when it comes to Victoria. Victorian spending is down 5.8 per cent on the year while four states and territories are showing double-digit gains in spending. And Victoria was the only economy to record a fall in housing finance in June.
• For those in the workforce, the cost of living fell by a record 2.6 per cent in the June quarter to be down 2.1 per cent over the year. But for age pensioners, self-funded retirees and pensioner & beneficiary households, the cost of living rose slightly. Provision of free child care and the fall in the price of petrol are the key factors explaining the different living cost results. The two $750 economic support payments fill the gap for those receiving social security, veteran and other income support, such as pension concessions. But many self-funded retirees may miss out on these support measures.
• While refinancing eased from highs in June, it’s still up a massive 74 per cent on a year ago. The other area of housing finance to lift over the past three months has been renovations (alterations and additions), up 12.8 per cent since March. Many of those now favouring working from home are realising they need extra space or a reconfiguration of space – including a home office – to efficiently manage their new work preference.
• In troubled times there is a tendency for Aussies to squirrel away some cash. The favoured denominations are $50s and $100s. And there is evidence of cash hoarding in this COVID-19 environment. The value of $100 notes in circulation has grown 14 per cent over the past year – the fastest pace since the 1991 recession. And the value of $50 notes in circulation has lifted almost 21 per cent over the past year – the fastest pace since the global financial crisis.
What do the figures show?
• The value of home loans rose by 6.2 per cent in June (consensus: flat) with owner-occupier loans up by 5.5 per cent and investor loans up by 8.1 per cent. The accompanying table has the details of lending per category.
• The value of loans to first home buyers in June rose by 3.3 per cent and was 19.5 per cent higher for the year.
• The number of owner occupier first home buyer loan commitments rose by 6.2 per cent in seasonally adjusted terms.
• By value, first home buyer loan commitments accounted for 36.4 per cent of all owner-occupier home loans in June (excluding refinancing) – down from a decade high of 37.4 per cent in April.
• Personal finance fixed term loan commitments rose by 5.2 per cent in June after rising 14.5 per cent in May and after falling by 24.9 per cent in April. Commitments were down 10.9 per cent on a year ago. Car loans rose by 20.4 per cent in June after rising 41.1 per cent and after falling 37.8 per cent in April.
• Personal lending from revolving sources (including credit cards) fell by 14.6 per cent in June after rising by 11.5 per cent in May. Loans were down by 27.2 per cent over the year.
• New finance leases fell by 6.1 per cent in June after falling 0.4 per cent in May and after rising by 26.4 per cent in April. Finance leases were up 14.7 per cent on the year.
• The value of new loan commitments to businesses for construction rose by 57.3 per cent in June after falling by 39.2 per cent in April. Loans were up 2.4 per cent on the year.
• Loans for the purchase of property by business fell by 15.3 per cent in June to be down by 51.4 per cent over the year.
New vehicle sales
• In July 2020, 72,505 new vehicle purchases were made, down 12.8 per cent on a year ago. It was the lowest July result in 17 years.
• The Federal Chamber of Automotive Industries reported: “The July 2020 market of 72,505 new vehicle sales is a decrease of 10,679 vehicle sales or -12.8 per cent on July 2019 (83,184) vehicle sales. July 2020 had the same number of selling days (27.0) as July 2019 and this resulted in a decrease of 395.5 vehicle sales per day.
• The Passenger Vehicle Market is down by 7,237 vehicle sales (-28.5 per cent) over the same month last year; the Sports Utility Market is down by 1,334 vehicle sales (-3.5 per cent); the Light Commercial Market is down by 1,812 vehicle sales (-10.8 per cent); and the Heavy Commercial Vehicle Market is down by 296 vehicle sales (-9.3 per cent) versus July 2019.
• Toyota was market leader in July, followed by Mazda and Hyundai. Toyota led Mazda with a margin of 7,702 vehicle sales and 10.6 market share points.’
• Sales across states and territories over year to July: NSW (down 7.8 per cent); Victoria (down 27.8 per cent); Queensland (down 9.1 per cent); South Australia (down 5.0 per cent); Western Australia (down 1.0 per cent); Tasmania (down 22.6 per cent); Northern Territory (down 4.5 per cent); ACT (up 30.6 per cent).
• The rolling annual total of new vehicle sales in July was 940,137, down 14.5 per cent on the year after falling 13.7 per cent in the year to June. Rolling annual passenger car sales fell by 26.6 per cent on the year with SUVs down 7.6 per cent and “other vehicles” down 12.1 per cent.
• In the year to July, SUVs accounted for a record 64.1 per cent of combined SUV and passenger vehicle sales.
Purchasing managers surveys
• Commonwealth Bank (CBA)/IHS Markit Services Purchasing Managers’ Index (PMI) rose from 53.1 points in June to 58.2 points in July. Any reading above 50 indicates an expansion in activity.
• The Commonwealth Bank Composite Output Index, combining readings on services and manufacturing, rose sharply from 52.7 points in June to 57.8 points in July – the fastest rate of expansion in three years.
• The AiGroup Performance of Construction Index (PCI) rose by 7.2 points in June, up from 35.5 points to 42.7 points in July. Readings below 50 indicate a contraction of activity.
CBA credit and debit card spending
• CBA card spending was 3.2 per cent higher than a year ago last week (week to July 31) compared to a 9.8 per cent annual gain the week earlier. The data captures the Stage 3 lockdown in Metropolitan Melbourne, but not the Stage 4 lockdown.
• The Stage 3 lockdown is having an impact on the Victoria numbers with CBA card spending down 5.8 per cent in the week to July 31 compared to a year earlier. CommBank Group economists “expect the move to Stage 4 to have a profound impact on consumer spending in this state.”
• Strongest annual spending gains occurred in Tasmania (up 18.8 per cent); Western Australia and South Australia (both up 11.6 per cent) and Northern Territory (up 10.3 per cent).
What is the importance of the economic data?
• “Lending Indicators” is released monthly by the Bureau of Statistics and contains figures on new housing, personal, commercial and lease finance commitments. The importance of the data lies in what it reveals about the appropriateness of interest rate settings, confidence and spending levels in the economy.
• 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 weekly Commonwealth Bank (CBA) credit & debit card spend data is derived from transaction authorisations to give a near real-time view. This means that cancelled authorisations, refunds, reversals, etc. will not be included. Data has not been adjusted for effects of consumers substituting between cash and card payments. CBA merchant facility spend data is derived from the Merchant Acquiring System which includes net sales from both CBA and Other Financial Institution (OFI) domestic and international cards.
• 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.
• The Australian Bureau of Statistics releases data each quarter on Living Cost Indexes – essentially price trends (inflation) for different demographic segments. The data is useful in understanding consumer spending trends.
What are the implications for investors?
• Economic recovery is indeed bumpy and uneven. Spending is up in some states but the outlook looks grim for Victoria. Extra support from Federal and State governments is likely to be needed. The car market is also decidedly listless. A ‘cash for clunker’ program could inject much-needed momentum into new car sales.
Published by Craig James, Chief Economist, CommSec