[Commsec Research]Building approvals slump; QLD retailers benefit from rebuil

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Building approvals slump; QLD retailers benefit from rebuilding

Building Approvals; Retail trade; Private Sector Credit

¾ Council approvals to build news homes fell by 7.4 per cent in February after sliding by a revised 11.6 per cent in the prior month. In annual terms approvals are down 21.8 per cent on a year ago.

¾ The floods continue to play a part in the weak result, but even excluding Queensland, new dwelling approvals fell by a considerable 6.6 per cent in February.

¾ Retail spending grew by 0.5 per cent in February – in line with the Commonwealth Bank Business Sales Indicator which was released two weeks ago. Over the past year retail trade lifted by just 3.6 per cent.

¾ Across the states, Queensland retailers outperformed their peers with sales up 2.3 per cent in February.

¾ Private sector credit rose by 0.5 per cent in February to stand 3.4 per cent higher than a year ago. Housing credit grew by 7 per cent in annual terms marking the weakest annual growth rate in records going back 34 years.

What does it all mean?

· The weakness in housing activity is here to stay – at least for the near term. After sliding by almost 12 per cent in January, approvals have slumped by a further 7 per cent in February. In fact in annualised terms approvals are now down over 24 per cent on a year ago. Whichever way you cut it the weakness in housing activity is plain to see.

· There is no doubt that the wet weather and in particular the floods in Queensland have had a serious detrimental impact to activity levels. Especially given that Queensland approvals have fallen by over 20 per cent in the past two months, but even when Queensland is excluded, approvals fell by a sizeable 6.6 per cent in February.

· The building approvals series tends to be volatile especially given that apartment approvals, tend to be lumpy. And it is important to note that the figures are likely to be revised in coming months, given the flooding. Despite the possibility of revisions to the data, it is clear that there is an underlying level of weakness in housing activity. Not only is overall building approvals plummeting but the all important private sector new house segment remains weak, with a 17 per cent slide in the annual growth rate.

· The retail sector has certainly done it tough over the past year. Annualised growth in sales is still subdued at just 3.6 per cent – a far cry from the decade average growth of 6 per cent. The tightening of monetary policy and unwinding of stimulus has been the key reason for the turnaround in the fortunes of the retail sector. The domestic economy is not shooting the lights out and retail activity is sluggish.

· The larger department and chain stores have fared better, given the ability to discount to a greater degree. In annual terms sales are up 4.5 per cent at the larger retailers while smaller retailers recorded growth of just 2 per cent. On a positive note Queensland retailers outperformed their peers in the month of February with sales up 2.3 per cent. It may be an early sign of the rebuilding that should gain traction in coming months.

· Part of the sustained weakness in the retail sales data can be blamed on lower prices, rather than weaker spending, given the widespread discounting taking place across the retail sector. However weaker volumes are clearly playing their part. Prices of some goods are coming down because our dollar is strong, but plenty of retailers are cutting prices because consumers refuse to spend.

· The Australian economy has certainly lost momentum over the last couple of months. Not only are house prices going backwards, but retail spending is barely growing. And even the latest improvement in private sector credit comes after considerable period of weakness. The pickup in business credit is encourage but follows seven months of going backwards. Further improvements would be needed in coming months to claim a full blown turnaround.

What do the figures show?

Retail trade:

· Retail trade rose by 0.5 per cent in February after a 0.4 per cent rise in January. Non-food retailing rose by 0.9 per cent in February after fall by 1.1 per cent rise in the prior month. Over the past year retail trade lifted by just 3.6 per cent.

· Sales by chain stores and other large retailers rose by 0.5 per cent in seasonally terms in February while sales by smaller retailers rose by 0.6 per cent. In annual terms sales at chain stores were up 4.5 per cent on a year. Sales at smaller retailers were up just 2.0 per cent on a year ago.

· During February, sales increased most at other Furniture, floor coverings, houseware and textile goods retailing (up 4.3 per cent). Other retailing groups like newsagencies, stationary shops and florists recorded healthy gains up 3.1 per cent in the month. Sales fell most at other recreational good retailers - including sporting, entertainment and toy retailers – (down 2.2 per cent), followed by footwear retailers (down 1.1 per cent).

· Across the states sales lifted most in Queensland (up 2.3 per cent), followed by Northern Territory (up 1.7 per cent), Western Australia (1.6 per cent), and Tasmania (up 1.3 per cent). Sales fell in the ACT (down 1.6 per cent), South Australia (down 0.5 per cent and Victoria (down 0.3 per cent).

Building Approvals:

· New dwelling approvals fell by 7.4 per cent in February, after sliding by a downwardly revised 11.6 per cent in January. Dwelling approvals are down 21.8 per cent on levels of a year ago.

· Excluding Queensland new dwelling approvals fell by 6.6 per cent in February.

· House approvals rose by 0.5 per cent in February (private sector up 0.2 per cent), after sliding by 2.8 per cent in January. Apartment approvals fell by 20.5 per cent in February (private sector was down 20.0 per cent) after sliding by 23.3 per cent in January. In annual terms apartment approvals are down 26.1 per cent on a year ago, while house approvals are down 19.5 per cent.

· Dwelling approvals fell in three of the six states in January, with Victoria (down 23.1 per cent) faring worst followed by Queensland (down 11.8 per cent). Approvals rose the most in Tasmania (up 44.4 per cent) and South Australia (up 35.9 per cent).

· In annual terms approvals across the state: NSW (down 10.4 per cent), Victoria (down 17.6 per cent), Queensland (down 38.7 per cent), South Australia (down 2.4 per cent), Western Australia (down 38.6 per cent), and Tasmania (up 1.2 per cent).

· The value of building approvals rose by 13.7 per cent in February and was lower by 9.5 per cent on a year ago.

Private sector credit

· Private sector credit (lending) rose by 0.5 per cent in February after rising by 0.3 per cent in January. Credit growth is up 3.4 per cent on a year ago.

· Housing credit grew by 0.5 per cent with lending to owner-occupiers rising by 0.6 per cent and investor housing up 0.4 per cent. Housing credit is up 7.0 per cent on a year ago – the weakest annual growth in 20 months. Owner occupier housing credit is up 6.8 per cent on a year ago - slowest pace in records going back 20 years. Investor housing lending was up 7.5 per cent on a year ago.

· Personal credit remained rose by 0.2 per cent in February after rising by 0.1 per cent in January. Personal credit was up 0.7 per cent over the year – still well below the rate of inflation. Business credit rose by 0.6 per cent after sliding for seven straight months. Business credit is down 1.7 per cent on a year ago and has been consistently contracting for the past 20 months.

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 Bureau of Statistics’ Retail trade publication contains the most current readings on the performance of consumer spending. The ABS surveys 500 ‘larger businesses’ and 2,750 ‘smaller businesses’. Retail trade covers spending at a broad range of retail outlets but excludes both petrol and motor vehicle sales. A weak retail trade result may point to a slowing economy as well weighing on the share prices of listed retail stocks. But retail trade estimates can’t be assessed in isolation – it is important to look at the influences determining future trends in consumer spending, such as income, employment and confidence levels.

· Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.

What are the implications for interest rates and investors?

· The domestic economy is certainly facing headwinds, with the higher Australian dollar curbing tourism and making exports less competitive. At the same time the conservative attitudes of consumers have ensured that retail activity remains relatively weak, while activity in the housing sector remains sluggish.

· More and more it is looking like the Reserve Bank will stay on hold on the interest rate front over the next couple of months. There is nothing in the data to force the Reserve Bank to once again look at rate hikes in the near term.