Economy Weakens, Foreign Debt surges

Sydney, Dec 3, 2008 (ABN Newswire) - Figures released yesterday by the Australian Bureau of Statistics left growth estimates for the September quarter just as confused as they were before the release.

The figures didn't have much influence on the RBA's decision: they were too historical in the case of the September quarter numbers, while retail sales figures are still too "rubbery" for comfort.

ABS trend figures for retail trading in October said there had been a rise of 0.25 in the trend of sales for October, September and August. 

A seasonally adjusted figure buried in the release suggested there had been a recovery in retail sales in October of 0.7%, compared to September's fall of 1%. That adjustment is based on a smaller sample.

Food retailing was strong, but clothing and homewares, plus cafes remained weak.

The ABS figures showed that thanks to the lingering effects of high oil, coal and iron ore prices, our current account deficit again shrank in the September quarter.

The Bureau reported that the deficit on goods, services and investment shrank to $9.74 billion from a revised $14 billion in the second quarter, a fall of 31%, seasonally adjusted.

"The surplus on balance of goods and services of $1,432m was a turnaround of $2,696 million on the revised $1,264 million deficit for June quarter 2008. The income deficit decreased $1,610 million (13%) to $11,072 million."

The ABS figures showed the current account deficit fell to 3.3% of GDP in the September quarter, from the previous quarter's 4.8%, as Australia's terms of trade, the ratio of export to import prices, rose 5.6%.

That was thanks to those higher coal and iron ore export prices, plus higher oil and gas prices. 

They are not going to last and the RBA has already warned that the terms of trade will fall sharply next year.

The data also showed Australia's trade balance swinging into surplus as exports, by value, rose by 10.2%, reflecting higher prices for key commodities coal and iron ore.

The ABS said "In seasonally adjusted chain volume terms there was an increase of $1,088 million (11%) in the deficit on goods and services. 

"This is expected to detract 0.4% from growth in the September quarter 2008 volume measures of GDP.

But with investors focusing on highly indebted countries and companies, there was unwelcome news: our net debt has blown out sharply, thanks to the plunge in the value of the Australian dollar.

The ABS said our net international investment position at the end of the September quarter rose $12.1 billion to a net liability position of $709.6 billion.

"Australia's net foreign debt liability increased by $43.3 billion to a liability of $658.0 billion.

Australia's net foreign equity liability decreased by $31.3 billion to a liability of $51.6 billion.

"The ABS said the $12.1 billion increase in the net position came from net transactions of $10.7 billion; price change of $5.0 billion and exchange rate changes of a negative $3.7 billion.

The $31 billion fall in our net international equity position was mainly due to the slump in the value of the dollar of $57.3 billion. It was "partially offset by increases due to price changes of $22.9 billion and transactions of $3.2 billion.

"Australia's net foreign debt liability increased by $43.3 billion (7%) to $658.0 billion. 

"Increases (were) due to exchange rate changes of $53.6 billion and transactions of $7.5b were partially offset by a decrease due to price changes of -$18.0 billion," the ABS reported.

Goldman Sachs JBWere economists warned yesterday morning that Monday's Business Indicators revealed more deeper problems.

"The boost to profits from the lagged pass-through of higher bulk commodity contract prices was anticipated.

"The striking feature of the report is the broad-based weakness in non-mining sales volumes, particularly across Transport & Storage (-3.8%qoq), Property & Business services (-1.4%), Wholesale trade (-0.1%), Manufacturing (-1.1%), Construction (-5.2%).

"We suspect we have now passed-through the peak in the profit cycle, and it is worrying that a general downturn in real activity will coincide with a rapid unwinding in the commodity price gains of recent years.

"Our Q3 GDP forecast is unchanged and we continue to look for a 0.3% qoq contraction in aggregate activity in the September quarter.

"Such a quarterly outcome would be the weakest in almost 8 years and, we believe, kick-off a domestic recession," Goldman's said in a note to clients.

Merrill Lynch said that "the aggregate profit data is still showing the benefits of the strong rises in commodity prices and mining sector profits earlier this year. 

"With commodity prices falling sharply over 2H08, a significant part of the income gain in the mining sector will unwind during 2009.

"The gross operating surplus outside of the mining sector is already weakening in response to the weakness in both domestic and external demand and resultant pressures on sales volumes and margins."

The Housing Industry Association sees no real; chance of a recovery in home building until later next year.

The HIA said yesterday that home building will again fall this financial year with the impact of interest rate cuts not likely to impact the market until 2009-10.

The Association said in its September quarter outlook that 2008-09 housing starts are forecast to fall 7% from the 2007-08's 145,300, due mainly to a weak second half of calendar 2008.

"Housing starts will be significantly weaker in 2008/09, reflecting the lagged impact of higher interest rates last (financial) year running head on into the global credit crisis and a sustained lack of household and business confidence in Australia," HIA chief economist Harley Dale said in the forecast.

"We do expect to see a moderate recovery in new home building over 2009/10 and 2010/11, and this will be very important in bolstering overall activity in the Australian economy."

Housing starts are forecast to grow by 4% in 2009-10 and 5% in 2010-11 to reach 158,000 starts, which will still be 30,000 or so under what's believed will be the level of demand in that year. 

Demand is thought be running around 170,000 to 180,000 at the moment, depending on the economy.

After a flat year in 2008/09, housing renovations are forecast to increase to a record level of $32 billion in the two years following, the HIA said.


 

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