On the Hotspot: Construction and Job Advertisement Indexes

The Australian Industry Group (Ai Group) – Housing Industry Association (HIA) Performance of Construction Index rose 2.9 points between July (39.5 points) and August (42.4 points)*

*http://economics.hia.com.au

Key findings of the report include:

• The national construction industry continues to decline but at a slower rate than the previous month
  • Engineering and commercial construction were the main negative influences
  • Apartment sector rate of decline easing
  • House building projects increased for a second consecutive month
• Residential builders frequently noted that customer enquiries and buying levels had continued to improve because of low interest rates and stimulus from the First Home Owners grant.

What does this mean for Australians?

The data represents another indicator that future positive economic growth will be sustained and stronger in the near future, but highlights the importance of the Australian Government’s stimulus measures to keep the national construction industry resilient to the effects of the global financial crisis.

It is not surprising that commercial construction is still lagging because without strong indicators of future positive economic growth around the world’s advanced economies, any investment in construction would be risky without greater certainty to future demand.

However, if the economic situation continues to improve around the world, the risk for commercial construction will decrease and will translate as a positive influence on the index in the near future. Such a time would put pressure on the Australian Government to reduce its stimulus measures as private investment and consumption return to previous highs.

In the mean time, the continued stimulus measures are keeping the industry active. However, the level of stimulus will reduce over time as Australia’s economic growth continues in the face of the global financial crisis.

The national construction industry will be well placed (if this index is any indication), when the Australian Government stimulus measures begin to be wound down as positive economic growth becomes more certain in Australia and around the world. However, any move to reduce stimulus must be staggered to avoid any negative shock to the construction industry.

 

The Oliver Job Index August 2009 grows 2.43% in August*

*http://www.olivier.com.au 

The Olivier Job Index grew 2.43% in August, the first real growth since May 2008. Robert Oliver, Director of the Oliver Group said in their press statement, “job creation has turned a corner.” The index highlighted big positive swings in part-time jobs (up 10.8%), and casual work (up 11.5%).

What does this mean for Australians?

The report means that there are positive reasons to believe in stronger future economic growth in Australia. In particular, it signals that firms in the economy have the expectation that demand in the future is increasing and thus find it prudent to bring back staffing levels back to capacity.

Expectations play an important component of future economic growth because increased levels of employment are synonymous with an economic expansion in an economy. More importantly, advertisements in part-time and casual work indicate that those positions that were first lost during an economic downturn are back in vogue.

This will provide positive feedback into the economic system with more increased private consumption and investment in future economic quarters. If the pick-up of advertisements is strong over the next economic quarter, it will result in a likely increase in official interest rates before and after the Christmas period to tackle the threat of inflation.

The pick-up in new jobs could be sluggish as described by ANZ’s acting chief economist, Warren Hogan in response to ANZ Bank’s monthly job advertisements series.* The data indicated a 4.1 per cent bounce in job ads during August. Warren Hogan referred to underemployment, as firms in Australia reduced employee working hours rather than job cuts and the increase in working hours will take precedence before taking on new staff.

*http://www.anz.com 

In light of the increased probability of higher official interest rates due to increased future economic activity, as these indexes might suggest, the threat of inflation in the near future will become the priority for the RBA.

It would therefore be prudent to organise finances to compensate for higher interest rates, especially for those university students, casual or part-time employees, and older Australians that experienced financial distress during the worst of the global financial crisis because they were not fully prepared.

Is it too soon to be excited about the 0.6 growth for the June quarter?

I like to consider myself an optimist who labours under the necessary burdens of realism, and in my opinion; we should be quietly pleased and hopeful for Australia’s economic future.  This subtle optimism is rooted in the knowledge that on the economic world stage, we are trendsetters.

The saviours for Australia for last quarter were increased ‘New machinery and equipment’ (0.5 percentage points) and ‘Household final consumption expenditure’ (0.5 percentage points). However, if lower export earnings continue into the future we could see our economy flagging with the rest of the world.

However, if over the next 12 months the advanced economies of the world start enjoying positive economic growth the implication for Australians is that higher than expected economic growth in the June quarter could translate into earlier than expected rises in the official interest rate.

Currently, it seems the consensus around the world is to keep stimulus measures in place until the optimal time when private expenditure returns to previous highs. If the measures work as it appears in Australia, then can the RBA really wait any longer until they raise official interest rates?

Would increases in the official interest rate be a bad outcome for Australian?

In my opinion, it would be a good outcome because it would help avoid the economic problems associated with higher inflation over the short-term. The decision making process for increasing official interest rates before the end of the year are complicated.

The advanced economies of the world are facing significant negative economic growth that is affecting export earnings that have driven past booms in Australia. With continued stimulus, these countries will eventually return to positive economic growth, which would increase economic growth in Australia, greater than the mere 0.6 growth in the June quarter. With the economic troubles around the world continuing, it is difficult to determine when the world will move back into positive economic growth.

However, when greater positive economic growth does occur, Australia will face the same economic problem of inflation, affecting our cost of living. Furthermore, I find it inappropriate to hold official interest rates historically low for long periods, as it has in the past encourage risky business behaviour. The implicit problem is personal debt and how sustainable they are when inflation increases sharply and unexpectedly.

It is thus prudent to tackle a future problem earlier rather than later. There needs to be a consensus among the general population in Australia that the reason official interest rates are historically low is to spur economic growth, at a time Australia was experiencing lower exports and resource prices. We must fight against our history of reckless spending and risky business behaviour, such as occurred in the US and other countries, which translated into the global financial crisis affecting the world now.

I support sustainable economic growth rather than sharp variances of high and low economic growth over the long-term because the costs to an economy are real. The social implicit costs include increased defaults, financial distress, depression, mass layoffs, factory closures, and suicides to name a few real consequences of sharp and unexpected economic growth.

Other costs include inflation and skills shortages during economic booms, and defaults or financial distress during economic busts. Greed is not good all the time because reckless spending and risky business behaviour affect people when financial crisis occur in both booms and busts.

What is important is certainty and cooperation, between not only the RBA and the Australian Federal Government, but also between individuals in an economy. If that communication is not clear and concise, the problems of history will continue indefinitely to the detriment of our standard of living. It is important to increase interest rates to force individuals to make rational decisions in terms of personal debt. Mr Swan is doing just that, making his statements of late highlight that official interest rates will eventually increase and we all should be ready for that event.

In my opinion, any increase in the official interest rate will not be rapid and are for the benefit of future sustainable economic growth. At the same time, the Australian Federal Government will need to slow down their stimulus projects to assist the goals of the RBA and continue their reforms in terms of industrial relations, education, health, and taxation.