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Weekly Commentary

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Rollercoaster ride

Mon, Oct 6 2008, 13:06 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

The progress of the US financial bailout package understandably garnered most of the attention last week, sending financial markets on a wild ride. Beyond this, the local economic news has been blowing hot and cold as well, and is likely to do so again this week.

Last week began with a 7.9% drop in residential building consents in August, tracking the slump in home sales through the first half of this year. We were already expecting residential investment to contract by 20% this year, and the consents figures suggest that this weakness will continue into next year as well. Non-residential consents continued to trend higher, due to a shortage of prime office space in the major centres, but they remain below the levels of a year ago.

On the plus side, monthly business confidence rose sharply again in September, with the headline measure returning to positive territory – remarkably, it hasn’t been there since May 2002. The details of the survey were more modest, with some forward-looking measures such as profit expectations and employment intentions still negative on balance. Inflation expectations finally responded to the fall in fuel prices, but remain at historically high levels. At face value, the recent improvement in confidence is consistent with a healthy 0.5% rise in Q3 GDP. But other indicators suggest otherwise, and in particular the details of Q2 GDP suggest that there is still some weakness in dairy production, and a reversal in meat production after an earlier slaughter, due to come through.

The Westpac-McDermott Miller employment confidence index also rose in the September quarter, albeit only slightly. Current conditions in the jobs market have worsened, but confidence about the future increased. The survey accords with our outlook for the labour market: the downturn to data has been mild, but employment is very much a lagging indicator, and is expected to deteriorate further well into 2009. Even so, some industries are still desperately short-staffed, and those workers with the right skills will be able to demand compensation for the rising cost of living.

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Published on  Mon, Oct 6 2008, 13:08 GMT