THE BIG PICTURE: What traffic on Australia’s busiest airline route tells us about the economy

Economists are always on the lookout for new indicators to describe the health of the economy. And it isn’t just private sector economists. Reserve Bank researchers are always alert to the release of new surveys or statistics that can provide a different – and hopefully more useful – slant about what’s really going on in Australia’s diverse economy.

What makes a good indicator? Well you can’t beat hard “population-type” data. That is, complete figures describing some type of activity. We don’t have ‘population’ data on retail spending or even the job market – surveys are used to describe what is going on. And any ‘population-type’ data collections that can be said to be ‘leading indicators’ are also well regarded.

Of course there is no ‘perfect’ leading indicator. For instance, job advertisements are considered to be a leading indicator of the job market. Unfortunately there is no single source for job ads. There can also be double counting. Employers may also hire workers via ‘head hunters’, from overseas or internally.

One interesting ‘population-type’ indicator is domestic airline activity. That is, the number of people travelling on Australia’s domestic airlines. Airlines have been reporting this data to regulators for decades; in fact, annual data stretches back to 1944.

So what value can be provided by data on domestic passenger movements? The figures may be useful in highlighting activity for certain regions, especially key tourism centres. The figures can highlight growth in certain sectors, such as mining. And overall Australia-wide data may highlight consumer confidence and spending. But, as noted above, no indicator is perfect. More people may travel because fares have become cheaper. And that has certainly been the case over time.

Overall, Australian passenger numbers did soften in the second half of 2011 with annual growth of 5.5% in May turning into an annual decline of 3.5% in December. The encouraging news is that growth has picked up since and “revenue passengers” in February were up 4.7% on a year ago.

But one of the more interesting routes – and one of the busiest in the world – is the Melbourne-Sydney route. This is very much a ‘white collar’ route, and it may prove to be a good indicator of business spending as well as overall employment.

In fact, over the past decade, the growth rate of passengers on the Melbourne-Sydney route has led employment growth by around six months on average. The rationale is that increased travel corresponds with business activity, a freeing up of budgets and an increase in business spending.

So what are the latest figures? In February, passenger numbers on the Sydney-Melbourne route were down 0.3% on a year ago, but this is far stronger than the 5.7% annual decline in December.

The week ahead

Don’t panic! This happens each year but normal service will be restored. What am I referring to? Next week there are no major events on the domestic economic calendar. Nada. Zilch. And it is not much better in the US, but still there is plenty of housing data to watch.

There are only a few data releases or events worth noting in Australia.

On Tuesday, Australia’s chief commodity forecaster releases statistics on forest and wood products ­– perhaps of interest for some regional centres.

And on Wednesday the Department of Employment and Workplace Relations releases the April skilled vacancies survey.

It is worth noting however that the Bureau of Statistics does issue the 2012 Year Book on Thursday. This publication is chock-full of interesting statistics on Australia. The last publication was the 2009-10 issue, so there is a bit to catch up on.

In the US, the first piece of economic data is released on Tuesday in the form of the existing home sales statistics for April. After spiking higher in January, sales retreated over February and then fell a further 2.6% in March. The March decline was a surprise as weekly data had already suggested that demand for new homes lifted 10.2% in March.  Apparently the supply of distressed properties is drying up, crimping demand from investors: but any shortfall wasn’t made-up by owner-occupiers.

Economists expect that existing home sales rose by 2.5% in April. As well as sales, economists will watch home prices as data showed that prices in March were up 2.5% on a year earlier. The amount of stock on the market will also be watched. The latest figures suggest that 6.3 months of ‘normal’ supply of properties was on the market in March. Also released on Tuesday is the influential Richmond Federal Reserve survey.

On Wednesday, data on new home sales is scheduled together with the weekly mortgage bankers’ index of loan applications and the Federal Housing Financing Agency index of home prices.

New home sales are running along the bottom of a trough with annualised sales of 300-400,000 a month, down from a peak of 1.4 million in the mid-2000s. Sales have followed a zig-zag pattern in recent months and economists believe this pattern will continue with a 2.1% lift in April sales. As was the case for existing home sales, there will be interest in market supply and prices. In March, there was 5.3 ‘normal’ months of supply on the market and new home prices were up 6.4% on a year earlier.

On Thursday, the usual weekly data on claims for unemployment insurance is released – the best timely reading on the state of the job market. On the same day, data on orders for durable goods is released. Durable goods include items like appliances and cars – goods expected to last at least three years and a good proxy for investment.

Durable goods orders also have followed a zig-zag course of late. Economists tip a 1.0% rise in April after orders fell by 4.0% in March. The component ‘non-defence capital goods excluding aircraft’ is a proxy for business investment and orders may have risen 0.7% in April after a 0.8% decline in March.

And, on Friday, the final reading of consumer sentiment for May is slated for release. The preliminary reading showed a surprise lift in sentiment to four-year highs. But, given woes in Europe, these highs will be hard to maintain.

Also of note over the week, March quarter GDP (economic growth) data is due in Germany and the UK on Thursday. The influential German Ifo business index is also released on Thursday. “Flash” readings for the Performance of Manufacturing index are released in Europe and China also on Thursday.

Sharemarket, interest rates, currencies and commodities

Understandably, all eyes are on the Aussie dollar at present. But it is useful to keep things in perspective. The Aussie is regarded as a “fair weather friend”. In the good times, when there is optimism for the global economy, it tends to rise against major currencies. But in more uncertain times, investors flock to “safe haven” currencies such as the US dollar, Japanese yen and Swiss franc.

The weaker Aussie is not a reflection on Australia, more the fact that our country is a raw material (commodity) producer and demand for commodities is dependent on global economic growth. In the past a lower Aussie has been considered a negative development. But nowadays we are more aware that a weaker Aussie can be very beneficial, boosting competitiveness for a raft of sectors. Tourist operators and retailers like it as fewer people are likely to travel overseas and fewer people are likely to buy goods on the internet. Foreign investors are also more likely to buy Aussie shares.

The lower Aussie is even positive for motorists. Since the peak in early April, the Singapore gasoline price has fallen over 13%, but the Aussie has only dropped 2.5%. In fact, the Aussie has lost just 8.5 % since its peak in February.

Over the past 20 years the Aussie has fluctuated on average by US14.4 cents a year. This year the range has been US9.2 cents. Our strategists believe that the Aussie could fall to US98 cents in the short term, but look to the dollar at US105 cents by the end of the year as the Chinese economy lifts and Europe stabilises.

Craig James is the chief economist at CommSec.


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