The structure of the economy is always changing or evolving. But it is when the changes happen quickly that it confronts us, breeds uncertainty and causes problems for policymakers. And indeed that’s what is happening.
Certainly manufacturing has been in decline for decades with Australia evolving to a more service-based economy, just like other advanced economies. However, now the economy is being confronted with another change. China is in the ascendancy with significant demand for natural resources. In turn, the higher prices for the resources or commodities have led to greater demand for the Australian dollar. And the dollar continues to hover near 30-year highs. It is not the run up in the dollar that matters – especially for business. Rather it is the perception that the currency will remain stronger for longer. This is causing businesses to re-assess strategy. Hopefully the moves are, and will be, fully considered, as knee-jerk decisions will come back to haunt.
There is a perception that mining is taking over the Australian economy, but nothing could be further from the truth. The biggest sector of the economy is Finance & Insurance with a 10.5% share of GDP. But some may even contend with that observation. The Bureau of Statistics separately reports a number of sectors such as Professional, Scientific & Technical Services; Administrative & Supports Services; and Public Administration and Safety. If output of these sectors were added together they would account for 13.6% of GDP.
There is a battle for the next biggest sectors with Mining at 8.7% of GDP, Manufacturing at 8.6% and Retail & Wholesale Trade at 8.6% also. Construction accounts for 7.3% of output with Health Care & Social Assistance at 5.7%.
Interestingly, while Mining accounts for 8.7% of GDP, the share actually hasn’t been rising over time, rather it has come down from 10% of GDP at the start of the decade. The sector that actually has been rising strongly is Construction. And that trend will continue, in line with population growth and the demands of the Mining sector.
But size is just part of the equation. The other aspect is growth. The expectation is that Mining will grow strongly in coming years and other sectors will need to slow to accommodate the growth. But more work needs to be done on multiplier analysis. Arguably the multiplier effects of changes in consumer spending and housing construction are far bigger than Mining which is more concentrated regionally with links to fewer sectors.
There is a healthy spattering of new economic data in the coming week. In Australia the main interest is in retail spending and business investment data. In the US the spotlight will shine brightly on the ISM manufacturing index and employment estimates.
On Monday the Housing Industry Association releases July data on new home sales. In June, sales slumped by 8.7% to a nine-month low, so any improvement in activity in July would be most welcome.
On Tuesday a leading housing indicator – dwelling approvals – is back in the spotlight with July data to be released. Recent data has been extremely weak with five declines in approvals in the past six months. We expect some improvement in July with approvals up 2% after a 3.5% fall in June.
Also on Tuesday, the Bureau of Statistics will release new figures on household income and income distribution. The data is reasonably timely – covering the period up to June 2010 – so it will provide a good base to assess future consumer spending decisions.
On Wednesday, the Reserve Bank will release figures on private sector credit (lending). The recent softness of lending data was one factor cited by the Reserve Bank for leaving rates on hold in early August. We expect that credit edged up by 0.2% in July after falling by 0.1% in June.
Also on Wednesday, the RP Data-Rismark Home Value index for July is released. Home prices have been gently easing for the past six months, reflecting a balancing of supply and demand. But we are approaching the point when home prices stop falling and start posting very modest gains.
On Thursday data on retail spending, business investment and the Performance of Manufacturing index are released. Tourist arrivals data is issued on Friday. Retail trade has fallen twice in the past three months but we tip a modest 0.3% recovery in July. Business investment (or private capital investment) should have posted a solid lift of 5% in the June quarter, driving overall economic growth. And we would be looking for the third reading of expected investment for 2011/12 to be around $157 billion, up 13% on the second estimate.
In the US, the week kicks off with July figures for personal income and spending on Monday. Economists expect that income rose by 0.3% in July after a 0.1% gain in June – hardly suggestive of a recession. And consumption (spending) is expected to have rebounded by 0.4% in July after easing 0.2% in June. Figures on pending home sales are also released on Monday.
On Tuesday consumer confidence data is released alongside the Case-Shiller home price series and minutes of the Federal Reserve meeting held on August 9. Not surprisingly economists tip weaker consumer confidence and flat home prices. The Fed minutes will prove interesting given the diversity of views held by voting members.
On Wednesday the ADP employment report is issued together with the Challenger job layoff series, factory orders and a number of regional purchasing manager series.
On Thursday the ISM manufacturing index for August is released together with figures on construction spending, weekly unemployment claims, productivity and construction spending. Importantly the purchasing managers’ index for China will also be issued, providing guidance on how our major trading partner is faring.
And on Friday the pivotal non-farm payrolls (employment) estimates for August are issued. In July economists were pleasantly surprised with the 154,000 lift in private jobs. Analysts are tipping a further 125,000 lift in private sector payrolls in August – a result that will be sufficient to prevent the jobless rate from rising from the current rate of 9.1%.
It may seem like a distant memory now, but 2009 was a good year for world sharemarkets. According to FactSet, the “world” sharemarket rose by 14.1% in US dollar terms with the Australian market up 16.6%. The spread of returns was amazing with Argentina out-performing, up 73%, while Venezuela was down 47%. Only 11 of 51 markets went backwards – most in Europe.
In contrast most global sharemarkets have gone backwards in 2011 with only six of 51 markets in positive territory. In US dollar terms the “world” sharemarket has fallen by 10.6% since the start of the year with the Australian market down 11.2%. Asian sharemarkets have done well with Indonesia up 10% followed by New Zealand up 5%. Worst performers – Luxembourg, Turkey and Greece, all down near 30%.
The gold price averaged US$1,505 an ounce in the June quarter and has averaged $1,647 so far in the September quarter. Our CBA commodity strategists expect gold to be stronger for longer, mainly on the expectation that the US dollar will be weaker for longer. Our strategists believe that the average gold price will continue to lift to US$1,900 an ounce over September quarter 2012 before easing to US$1,750 an ounce in December quarter 2012.
The bad news for motorists is that our commodity strategists also expect the oil price to gravitate higher, averaging US$99 a barrel by June quarter next year and US$103 over December quarter 2012.
Craig James is chief economist at CommSec.
Smart Company is the leading online publication in Australia for free news, information and resources catering to Australia’s entrepreneurs, small and medium business owners and business managers.
