RBA Rate Decision – June 2014

Today the Reserve Bank met and kept interest rates on hold for another month.

It’s amazing what can happen after a federal budget and more importantly, an austere federal budget. We’re actually seeing what I said in my last video from last month is that this budget is an important budget. And it’s an important budget in terms of momentum in the economy and how people were feeling. You bring an austere budget in something like this and what you start to see is sentiment change and we’ve actually seeing that change. So now we’re in a position where I was thinking about interest rates moving in that sort of September or October period, but I did put caveat on that and that caveat was around this market sentiment. And I think we’re going to see now a little bit of slowing in momentum in the economy into the second half of 2014. What is interesting on the opposite side of that is the actual employment numbers is being really good. We actually saw over fourteen thousand new jobs created in the April data and overall for the year we’ve seen over 26,000 new jobs created in the economy. Now if we look back at the previous year in late 2013, we’re actually losing jobs at around two to three thousand a month. So, unemployment or employment I should say is working really well. In addition to that, we saw some data coming out last week around private business spending. Now private business spending was own over 4 percent and it’s the second quarter that’s being down over that 4 percent. The bottom line on that is that mining capital expenditure (capex) is actually down significantly and this has been well flagged by most economists that we were seeing a transition from the mining economy back into the general economy.

So what we’re actually seeing is mining capex was down around 8.7 percent but the silver lining in the data was that manufacturing spending and other industry spending was actually up and trending up and even more importantly, was forward forecast trending on that was to say they expected to see some gains in that area. Now I want to take a moment in talking about housing construction. I’ve mentioned before about how do we transition from a changing economy in terms of manufacturing and also from mining. So I’m gonna cut to a little graph that I got from the ANZ Bank. Now I just want to talk you through these numbers around construction approval and why that’s important and you’ll see what I mean in terms of we need to move those workers from the mining construction and keep them obviously in construction and on-hand work and that’s where I’m going to show you in terms of what lower interest rates can do and how that can stimulate construction in the economy.

[please refer to the graph in the video above]

So you can see this graph here on housing construction and you can see it from 98 up to 2014 across all states. Now, through the GFC and the GFC was around that sort of 2009 period, we see an absolutely incredible run in Victorian construction but also a trend up in most other states and that was the result of the stimulus package that was put in place in terms of the first time construction boosts in grants and bonuses. That’s what we saw this large construction period through here. We also know that there was an incredible movement and migration and population growth through this area into Victoria and into Melbourne particularly, we saw that construction boom through here. Now that’s all being sort of tapering off through 2012 and it’s been relatively soft and now we’re seeing interest rates come down and was seeing a gain in construction. The highlight here is the New South Wales market and more importantly the Sydney market. Construction and new approvals for home construction is having a fantastic time. So we’re seeing a lot of construction happening in the New South Wales market. In terms of Queensland you can see here we’ve got some good numbers coming up for Queensland but just a slow softening slightly in terms of that construction. Again WA was also having a very good time with low-interest rates and that’s important and then we got South Australia which hasn’t seen the type of level of activity that we would have hoped in terms of what low interest rates can do. And then, of course we’ve got the other markets which is significantly lower in terms of construction size so this is where you know you get that strong population drive and you get that transfer of jobs, of people coming into the marketplace. In terms of moving from a mining construction into potentially consumer, in this case housing construction but also into infrastructure construction and those type of things as well. All in all this graph tells us that you know we’re saying a pickup in housing construction and this is going to be an important part of our economic activity in our GDP numbers as we transition away from a mining boom.

So there’s the wrap for the June RBA Announcement. We’re gonna say probably interest rate remaining on hold throughout 2014. So I’ve changed my adjustment in terms of whether I thought interest rates will increase. Now I always have a caveat on this. My caveat is around inflation. If inflation gets too strong or the house price market also continues to push through in terms of uncomfortable levels for the RBA they are going to be the triggers, because I don’t think it’s going to be economic activity that’s going to be that trigger.

See you again next month.

(Those people watching/reading this should be reminded this is an opinion comment by Ben Kingsley, and should not be used when making decision about financial matters without seeking further clarification and understanding of your own personal circumstances. This article is not advice you should rely upon. I recommend you speak to one of our licensed professionals before taking any action with your financial affairs.)