There was a telling lack of political interest in this week’s two key data releases for the March quarter – the value of construction work done and the private investment figures. No press releases, no comments, not a whimper of commentary for what on the face of it, were two rotten sets of figures. And on the whole they were, but as always there was some good news buried in the detail, and lazy as our campaigning politicians are (and many in the media), that good news slipped everyone’s attention.
Nor has there been any interest in the way iron ore prices have slid – 30% or so in May alone to $US49.48 – and 10% under the $US55 estimate the 2016-17 Federal budget is based on. You can bet this and the details of this week’s data will not be recognised in any debate between the government and the opposition. Offsetting the slide in iron ore prices has been the fall in the value of the dollar from the 77 US cents in the budget to just over 72 US cents this morning. But none of this made into this week’s debates or discussions.
This week’s lack of attention to the bad and good news in this week’s data tells us a lot about the way the government and opposition (and the Greens will ignore anything remotely economic and rational) are ignoring the realities of the economy while they go on their spending and black holes campaigns.
Labor and the Coalition parties are as remote from economic reality as they have been at any time since the 2013 election. And yet the economy is far weaker, even if the growth data seems stronger (as we will see next Wednesday in the March quarter GDP report). While employment has improved, wages have fallen, along with inflation, the structure of economic growth has decomposed, national income is falling and contrary to what you might hear from time to time, there are few signs of that situation improving. Everything it seems has been held aloft by the house price and construction booms. In fact the RBA sees weak inflation, wages and subtrend economic growth continuing well into 2018 and into the run up to the 2019 Federal election.
It wasn’t ‘new’ news that business investment (and for that matter, the value of construction work done) again weakened in the three months to March This situation will go on for several more quarters as great mining over investment boom fades. So it wasn’t surprising that the Bureau of Statistics reported this week that private investment fell 5.2%, seasonally adjusted in the March quarter, to be down 15.4% over the year. (On the more accurate trend basis, capex was down 2.8% in the quarter and 15.4% over the year).
Recent federal budget and numerous comments in speeches and reports from the Reserve Bank have pointed to the continuing weakness and how it is skewing the GDP figures and helping to keep growth under trend, impacting nominal GDP growth, inflation and therefore the amount of revenue governments at all levels collect.
But it should also be pointed out that much of the quarterly report looks back – the most important part is the prospective spending plans. And, as the RBA has pointed out on several occasions, the Bureau’s capex figures understate investment spending because they tend to focus on plant, buildings, machinery and other big ticket items and find it hard to capture spending intentions in the service sector and among small and medium enterprises.
But the March survey has a glimmer of good news. The data included the second estimate for projected spending in the 2016-17 financial year and that’s where there were some better news for the economy. This second estimate was better than expected, up 6.3% on the first estimate, at $89.2 billion. But it was still nearly 15% down on the same estimate this time last year, which was to be expected. Looking at the details in the second estimate, the ABS said that for manufacturing:
"Estimate 2 for 2016-17 is $7.303 billion, 13.9% higher than Estimate 2 for 2015-16. Estimate 2 is 11.3% higher than Estimate 1 for 2016-17. Buildings and structures is 16.0% higher and equipment, plant and machinery is 9.6% higher than the corresponding first estimates for 2016-17.” And it was a similar story for other selected industries in the survey:
The ABS reported "Estimate 2 for Other Selected Industries for 2016-17 is $45,913 billion. "This is 2.0% higher than Estimate 2 for 2015-16. Estimate 2 is 6.2% higher than Estimate 1 for 2016-17. Buildings and structures is 11.6% higher and equipment, plant and machinery is 1.1% higher than the corresponding first estimates for 2016-17.”
What is important about that is the second forecasts for 2016-17 in both cases are higher than a year ago, indicating that investment in manufacturing and other sectors (services etc) is rising, perhaps driven by the positive influence of the lower dollar, weak wages and employment trends. It is only a small positive compared to the impact of the still falling investment in bigger projects.
But contrary to some comments yesterday about how the capex figures do not support the idea of transition for the economy, the investment intentions for 2016-17 for the sectors the RBA are looking for to lift investment, are proposing to spend more. It’s not much, but it is more than the first estimate three years ago and more than a year ago – and that is a small positive not to be denied. It does raise the chances that in a year’s time the impact of investment will turn from the deeply negative to a small plus for growth.
In terms of the wider economy and the budget it is still not enough to offset the slide in investment and spending on construction, which will have bigger impacts on the budget and the economy over the next year. Wednesday’s ABS figures on the value of construction work done probably contains more problems for the economy and the government than the investment spending data.
The ABS reported that the total value of construction completed in Australia, including building and engineering work, fell 2.6% in the three months to March from the December quarter. It was the third consecutive quarter of weaker activity, and reflects the slide resources spending, which overwhelmed higher spending in the housing sector.
The value of building work completed fell 1.0% in the first quarter from the previous quarter, while engineering construction fell 4.2% over the quarter. The level of construction work has been supported by a strong residential house-building boom in recent years, but the sharp drop in mining investment has offset the positive impact from housing. If it hadn’t been for the housing boom, the economy would be in a deep recession.
Housing construction activity was strong, as the trend figures from the ABS showed. “The trend estimate for total building work done rose 0.9% in the March quarter. The trend estimate for non-residential building work done fell 1.6% and residential building work rose 2.2%,” the ABS reported. But on a seasonally adjusted basis, the estimated value of total building work done fell 1.0% to $24.918 billion in the March quarter, thanks to weaker non housing and other types of construction. But did you hear any of this feature in the July 2 campaigning this week?
