Building Approvals point to Dwelling Construction turning the corner in QLD by end of 2018

Today saw the release of the Building Activity data for the second quarter of 2017 and it shows dwellings under construction falling in QLD (in particular unit construction)…see the chart below from Stephen Gosarevski, Economist at CCIQ.

But as readers will know, the trend in residential building approvals in QLD has turned something of a corner and we have been looking at a reasonable recovery since late last year (see here for latest commentary). Not surprisingly, approvals are a leading indicator for actual construction work. As the chart below makes clear, that lead averages anything from about 7-10 months with turning points in approvals seeing similar shifts about 7 to 10 months later in dwelling construction.

Given the recovery in residential approvals started in QLD in Dec 2016, with the quarterly data turning upwards in March 2017, we can expect to see a similar recovery take hold in quarterly construction work by the final quarter of this year (assuming the recovery in approvals remains relatively intact).

Pete on radio 4CA this morning talking about our submission to the Productivity Commission’s Transitioning Regional Economies report

Pete was on radio 4CA this morning with John MacKenzie talking about his submission to the Productivity Commission’s Transitioning Regional Economies report (you can download the full submission from the PC website here). You can listen to the interview below.

Cuts to ABS funding likely to make better regional data a pipe-dream

One of the less publicised elements of the 2017-18 Budget released on Tuesday was the decision to slash funding to the Australian Bureau of Statistics (ABS). Tucked away in Budget Paper 4; Agency Resourcing is a reduction in funding for the agency of some $218m (33.6%) for the next financial year. Further cuts are projected in 2018-19 and 2020-21 to bring expenses down to $375m by 2020-21 from $622m 2016-17.

Where these massive cuts are to be found is left unclear. The Budget papers note that “(a) number of Commonwealth agencies are taking advantage of technology and other innovations to provide more productive and efficient ways of working such as establishing flexible working environments, including converting offices to open plan and activity based working facilities, to enable co-location and improving remote access technology to allow staff to work from anywhere” and that these reforms will save the ABS some $5.5m per annum from 2018-19. However, that would appear to be only a small contribution to the budgeted cuts of more than $220m by that time.

The same Budget paper also notes a reduction in ABS staff by 408 (14%) next year although a note to this table states that ” (t)he projected decrease is due to various reforms within the Department and Machinery of Government changes that moved staff to the Department of Employment and the Department of Finance.” But it provides no further information about the scale of those staff movements or the impact they might have on ABS services.

For some time we have been concerned about the lack of reliable and timely regional data coming from the ABS (and other agencies) and the impact this might be having on decision and policy making. It was for this reason that we developed the Conus Trend Regional Labour Force series. In discussions with senior officials in the ABS it has become clear that they acknowledge the need for better regional data, and are aware of the needs being expressed to them by “clients” for such data. To quote one such senior ABS official when discussing the Conus Trend series, “we continue to be reminded of the interest in small area labour market statistics by our clients, so it is good to hear that someone is trying to fill in some of the gaps.”

Cuts such as those announced this week will do nothing to help the ABS providing much needed regional data in the future. We are therefore committed to continuing to develop and enhance the Conus Trend Regional data-sets and hope to be soon releasing our Conus Trend Industry Employment series for Queensland regions. 

The most recent Conus Trend data-sets for regional labour force and building approvals can be found on our Reports page.

Budget kicks the can of structural repair down the road

Among all the Budget 2017-18 announcements and trumpeted measures (of which Nick Behrens from QEAS provides as good a summary as any here) the most interesting (disappointing?) chart for me comes in Budget Paper 1, Statement 3 regarding the Structural Budget Balance. As the Budget acknowledges; “Restoring the structural integrity of the budget is crucial for achieving surpluses on average over the economic cycle and paying down government debt“.

The Budget papers go on to say…”The structural budget balance estimates seek to remove factors that have a temporary impact on revenues and expenditures, such as fluctuations in commodity prices and the extent to which economic output deviates from its potential level. Considered in conjunction with other measures, estimates of the structural budget balance can provide insight into the sustainability of current fiscal settings. Improvements in the terms of trade since the 2016-17 MYEFO are cyclical. As such, Treasury estimates of the structural budget balance over the forward estimates are largely unchanged since MYEFO.

Essentially what they are saying here is that the resource price led mini-windfall that the Government is enjoying now (and which has added some $5bn to revenues over the forecasts to 2020-21) is unlikely to last. Additionally, none of it is being used to improve the long-term structural position. In the years to 2020-21 total revenues are forecast to be some $11.4bn above those forecast in the 2016-17 MYEFO ($6.4bn of that due to increased taxation of various types announced in this Budget) and yet, as the Treasury admits, “estimates of the structural budget balance over the forward estimates are largely unchanged since MYEFO.”

If we want to address the structural deficit that we face then we need to be bold enough to take opportunities to improve it when they present themselves. This Budget has used such an opportunity to increase spending instead.

One for the economics geeks: What’s the last 22 years of unemployment and inflation data in Australia tell us about NAIRU and the Phillips Curve?

Apologies to any others, but if you’re not a dyed in the wool economics tragic read no further.

Back in uni days (over 30 years ago now) the old Phillips Curve theory was still being tossed around (although with modifications from the 1950’s original) and it’s always been something I’ve had niggling at the back of my mind in a very simplified form. My simplified form (in the short term) runs something like this;

If the level of unemployment falls close to, or below, NAIRU (which has generally been thought of as at about 5%, although these days may be lower) doesn’t it make sense that there would be some upward pressure on wage costs and therefore prices?
In addition, isn’t it reasonable to say that those wage pressures would take some time to end up being reflected in actual consumer inflation? (note I’m bypassing the whole idea of rational expectations).

I’ve therefore been a close watcher of unemployment levels and core inflation data with a 12 month lag (an arbitrary lag imposed to allow for that delayed effect on prices). When we plot this relationship for Australian unemployment data from June 1993 to June 2015 (latest data allowing for the 12 month lag in inflation) what we see is below.


A few things appear obvious straightaway:-

  1. The supposed inverse relationship of the classic Phillips Curve is obviously less than robust across all data!
  2. The relationship appears far more robust as we go below about 5.6% unemployment
  3. No matter what kind of trend line you try and fit to the data (and the graph has a number from linear and log to trinomial) the convergence at 5% unemployment and 3% core inflation is obvious.

I’m certainly not trying to suggest that we should be looking at this in any way as a predictor of future inflation; although over the past year unemployment has fallen from 6.1% to 5.8% and would therefore suggest at least the possibility of a move upwards in core inflation over the next 12 months. But it does at least give me some sense that there is a sound reason for the 3% upper inflation target range for the RBA (particularly if we buy into more modern Phillips Curve thinking that would suggest the long term curve is simply the vertical line at NAIRU).

Any other geeks out there got a thought? I’d be interested to hear.

Some good news for small business but the Budget puts off any attempt at fiscal repair

The 2015-16 Budget announced last night contains some welcome initiatives for small business. The reduction in the tax rate for small business to 28.5% will actually impact only a few companies, so the 5% tax discount (up to a max of $1,000 per individual) for small non-incorporated businesses is perhaps a more significant measure in the small business space. The move to allow 100% offset of asset purchases up to $20,000 (for two years) could also act as a welcome stimulus for small business wanting to invest in productivity improving assets.

I will leave more in-depth analysis of the intricacies of the budget to the plethora of commentators far better qualified than me. However, looking at the budget from a purely economic basis (something that Joe Hockey patently didn’t do) there is a glaring problem. Given that tax revenues rely upon nominal growth (rather than real growth) it concerns me greatly that the budget has forecasted nominal GDP leaping from +1.5% in ’14-15 to +3.25% in ’15-16 and then +5.5% in ’16-17. The rationale behind those projections would appear to be not only a return to near-trend real GDP growth by ’16-17 but a dramatic turn around in the GDP deflator which is forecast at -1% this year but +2.25% by ’16-17.

With this forecasted/projected run of more growth years the Australian economy would enter an unprecedented run of 26 years without a recession. We must all hope that comes to pass because if it doesn’t then this budget will be exposed as a smoke and mirrors exercise with no real attempt at fiscal repair having been made. The “budget emergency” from last year has simply been kicked down the road for another year or two in the hope that a lower A$, forecasted stronger growth and lower unemployment together with income tax bracket-creep will dig the budget out of its structural hole. Even if that proves to be accurate, the long term will demand that a government (but presumably not a government in as much trouble as this one) will eventually have to make the decisions that Joe claimed to want to make last year. In the words of Jon Snow, “Winter is coming”……but not this year.

Measuring GDP….a new thinking

A great friend of ours, Graham Turner, runs an independent economic consultancy (GFC Economics) in London. Graham founded GFC in 1999 after many years working as an economist with various international investment banks in the City. Graham has written a number of highly regarded books, the most recent of which (The US Economic Recovery) I can highly recommend. He has recently written, with a colleague, a fascinating paper on the measuring of GDP. Graham’s paper is focused specifically on the US but the themes and ideas that he discusses are certainly relevant to the measurement of GDP in Australia.

I was at Uni with Graham in the early 1980s and worked with him in London for some years in the 1990s. Graham has very kindly allowed me to make his paper available to Conus Blog readers. You can download the paper here…..Measuring the US economy

As Graham points out “the ‘economy’ is a continuously evolving concept. Rapid technological change and the shift towards a services-based economy pose fundamental challenges for measuring Gross Domestic Product (GDP)“. And what we measure has real implications for the economy. “What the authorities decide to measure will affect GDP. This could highlight new sources of growth, which will in turn influence what the statisticians decide to measure. This is neatly summarised by Mr. Bernanke, who acknowledged that “what we decide to measure, or are able to measure, has important effects on the choices we make, since it is natural to focus on those objectives for which we can best estimate and document the effects of our decisions.”

Graham has some really interesting thoughts regarding the inclusion of intangible investments into the national accounts framework. This includes things such as computerised information, innovative property and economic competencies. The paper argues that “Investment is the commitment of current resources to increase future consumption (at the expense of current consumption). Any outlay satisfying this definition should, in theory, be treated as capital investment. From this perspective, investment in intangible capital ought to be capitalised in the national accounts.” Turner argues further that “knowledge creation, R&D, marketing, management, and organisational efficiency are strategic investments that contribute to the long-run growth and success of an enterprise. It is imperative that these components are accurately measured to ensure that the optimal incentive structures are in place to encourage investment in such areas.

The issue of how deflators can be created for these kind of intangibles is covered in some depth; and this is a vital issue. Graham looks at specific issues relating to items such as health care, software and R&D.

Of particular interest to us in Australia are Turner’s comments about the growing importance of small businesses in the US economy, and questions about whether this activity is being adequately picked up in the date. As Graham notes, “These firms tend to have higher growth rates and are an important pillar in driving technological innovation and productivity gains. Nevertheless, their size can make them more difficult to measure. Many non-employers and self-employed workers are excluded from official statistics. A significant number of small businesses may also be underrepresented in surveys. A proliferation of smaller enterprises may signal a shift in the traditional workplace landscape that could have significant implications for productivity.

In summary Graham suggests that the US recovery may actually be understated at present since many of the important positive impacts on economic growth from things such as technological improvements are not being adequately captured in national accounts data. It’s an interesting idea and a conversation that both he and I would be interested to see developed in Australia. We would be delighted to hear your thoughts on the paper, so please feel free to leave comments on this blog or contact me directly.


An idea in response to the Intergenerational Report

The IGR released yesterday (available here) demonstrates clearly, if rather politically, that the country faces a number of significant challenges over coming decades. One of the main being the fact that our future population will be living a lot longer and therefore putting an every greater burden on retirement savings.

It would seem obvious that over coming years the retirement age will push higher and the age at which retirement benefits (either aged pension or access to super savings) are available will get later. Resistance to such moves will only ever be temporary as governments of both colours face up to the reality. If we don’t want the publicly funded aged pension to be ever more heavily relied upon then we need individuals to start retirement savings earlier.

So here’s one idea to perhaps address this need for far greater individual retirement savings.

Government, on the birth of a child, rather than paying a Baby Bonus opens a superannuation account in the child’s name and deposits the Baby Bonus into that account. If we accept that retirement age is likely to be (at least) 70 by the time this newborn gets to that point, and we assume superannuation growth rates remain at a long term average of 5% (not an optimistic assumption!), then the $5,000 Baby Bonus payment balloons to a massive $152,000 by the time the baby reaches 70. What if Family Tax Benefit payments also went into the super account? The potential nest egg for the bub at 70 becomes significant. Not only does this provide a powerful antidote to the looming retirement savings challenge but it also provides a huge extra boost to the availability of investment funds in the country via the super savings channel.

Of course new parents would be disadvantaged initially, but the state is still providing a very real benefit to the child (which is what FTB and the Baby Bonus were really supposed to be about anyway).

It’s just an idea……

Speech worth reading

Our friend Gene Tunny (Queensland Economy Watch) gave a speech to the University of the Third Age, Redlands yesterday which is well worth a read. It’s an interesting precis of Australian economic history and a review of what might be in our futures.

Of particular interest for our region is what Gene has to say about the impact that aging baby boomers and the “collaborative economy” will have. I’m sure he won’t mind me quoting here at some length; my own emphasis.

“Recent forecasts from Deloitte Access Economics suggest strong jobs growth over the next few years in services, particularly in health, education and aged care, the latter a result of the ageing of the population, as the large baby boomer cohort moves into retirement age.

Incidentally, this has implications for consumption patterns and the types of goods and services in demand. There will be a great emphasis on cost-effective lifestyle and wellness goods and services by baby boomers. People who can help baby boomers age gracefully and keep fit and healthy will do well. I expect personal trainers, yoga instructors and other service providers will respond to the demands of retiring baby boomers with time on their hands, many of whom would have significant disposable incomes. Tourism providers will also benefit, and not just from grey nomads, but they will need to provide superior and interesting tourism experiences for baby boomers, many of whom have already traveled to many interesting places around the world.

In the medium to longer-term some important global trends will be important in shaping our economy.

First I’ll discuss collaborative consumption or the sharing economy – “what’s mine is yours” as Rachel Botsman, the expert on collaborative consumption, describes it. We’re realising that it no longer makes sense to own as many things as we once did, as the internet makes it so easy to find people who own something we want to borrow or hire, such as a motor mower or car.

Think about the ride sharing service Uber, for example, which now threatens the traditional business model of the taxi industry, which is protected by government regulation. Similarly Air BnB is providing an emerging threat to hotels and serviced apartments, by making it easy for home owners to temporarily rent out their houses or rooms.

The internet also makes it easy to find people who might want to barter or offer services in the expectation they’ll eventually be rewarded – an economy that operates on karma. An example of this is couch surfing websites that let people find places to crash in foreign cities.”

NSW sees the bulk of Retail Trade growth

Todays’ release of the June Retail Trade data shows turnover at current prices up 0.6% (seasonally adjusted) for the month. While this is stronger than expected it is hard to get away from the reality that retail sales are extremely sluggish when we consider that, when adjusted for inflation, turnover in volume terms was down 0.2% in the second quarter (after a 1.3% increase in Q1).

What is perhaps also somewhat disappointing is the fact that NSW accounts for the vast majority of all of the increase so far this year.  NSW makes up 31.6% of total turnover but has contributed 65% of the total growth this year. Queensland, on the other hand, makes up 20.7% of turnover but has contributed just 10.9% of the growth in 2014.

When considering the turnover at current prices data we see the following changes in the first 6 months of this year.

Turnover current prices % chg 1st half 2014
NSW 3.5
VIC 1.5
QLD 0.9
SA 0.6
WA -0.1
TAS 2.8
NT 3.9
ACT -4.6
Australia 1.7