Sydney, June 12, 2008 (ABN Newswire) - Figures out later today will give a hint of the impact of the slowdown on employment, but not much.

We have now seen enough information from retailing and housing to know that conditions in both economies are weak to very poor, but the resource industries remain strong, and the service sector, especially government and professional services, is still motoring along nicely.

Lending finance figures out this week confirm that the housing sector is in a deep slowdown, recession even, with not much hope of an upturn for a couple of years. 



That means the Reserve Bank won't be fearing an inflation breakout from that quarter, while petrol prices will clip demand in retailing and other areas of personal consumption.

In fact with central banks around the world now on alert against inflation and silly-headed financial markets urging rate rises (which would stiff the UK and US economies), our Reserve Bank is looking good. It's moved ahead of the pack to slow and then re-position our economy and probably won't lift rates any further, even if the markets reckon there will be two more rises this year.

Those rising oil and petrol prices, and the four rate rises and other interest rate increases from the banks, are taking a toll on domestic businesses.

Business confidence is flat, although it edged higher last month, but expectations, a far more important forward-looking indicator, fell, according to the latest NAB survey.

Yesterday consumer confidence was reported as falling even lower this month.

The reading, from Westpac and the Melbourne Institute mirrors the fall recorded in the Morgan consumer sentiment survey last Friday.

The latest Westpac-Melbourne Institute survey shows consumer sentiment fell to 84.7 points, almost a third lower than a year ago and was below 100 points for a fifth straight month.



That's the lowest since December 1992 when the economy was emerging the country's last recession.

Westpac's head of economics, Bill Evans expressed surprise at the reading and blamed the rise in petrol prices in the past month. He reckons it's the sort of fall we could expect after a rate rise, like we had three months ago.

"Petrol prices are likely to have been the main culprit behind for this sharp fall in the Index. The price of petrol surged by 7.6% from $1.45 a litre to $1.56."

Mr Evans said that unlike the last drop in confidence that was tied to a jump in petrol prices (which occurred in the wake of the Hurricane Katrina in the US in September 2005) consumers are also being hit by high prices in the supermarket and shopping centres.

The loss of confidence partly explains the downturn in housing and some retailing: although fast growing consumer entertainment retailer, JB Hi Fi is going against the trend with its second profit upgrade. 

That came only days after medium sized whitegoods retailer; Clive Peeters revealed an earnings downgrade for the 2008 year with second half profits all but vanishing as sales dried up in April and May.

The extent of the downturn in housing and finance can be seen from the latest finance figures from the Australian Bureau of Statistics.

They show that in April the total value of owner occupied housing commitments excluding alterations and additions fell 4.9% in seasonally adjusted terms.

"The seasonally adjusted series for the value of total personal finance commitments rose 5.8%. This was due to a rise in revolving credit commitments (up 14.6%), which was slightly offset by a fall in fixed lending commitments (down 3.1%)." 

Economists say that increase was due to the ending of margin calls and the re-establishment of new facilities as stockmarket conditions improved in April.

But in commercial finance, the seasonally adjusted value of total commercial finance commitments fell 14.6%, due to falls in both revolving credit commitments (down 20.2%) and fixed lending commitments (down 11.5%).

The latest figures confirm Tuesday's downturn in housing finance lending. There's been a 12% fall in year to date home loans and 18.1% excluding refinancings.

Economists say there's worse to come with building and home loan approvals falling.

The RBA won't be troubled by an outbreak of inflation from the housing sector for quite a while.

Some economists are now warning not to expect a recovery until late next year at the earliest: others are saying not until well into 2010.

UBS said yesterday that "The rapid tightening in financial conditions is having an unambiguous impact on housing market. The housing sector is particularly interest rate sensitive and often falls first in a tightening cycle. Against that backdrop, the 12% fall YTD in home loans should alleviate any residual concerns in the market as to whether interest rates are biting or not. They clearly are. Domestic demand is slowing; therefore inflation should moderate as capacity constraints ease.

"In that environment, market pricing for at least one more rate hike appears aggressive, notwithstanding oil price rises. Given that monetary policy is already far from accommodative, we expect rates to remain on hold. That said, ongoing oil price gains put at risk our expectations that rates could be eased in 1H09.

"And Goldman Sachs JBWere said: "Housing lending continues to fall sharply with the number of housing finance commitments for owner-occupied housing falling 3.0% in April. This follows a 5.7% fall in March and 7.4% in February. Finance commitments were down 14.2% over the 12 months to April (or 18.1% ex-refinancing). Over the three months to April, total finance commitments slumped 15.3%, the largest three month decline since 1989.

"The total value of finance commitments for all purposes (owner–occupied and investment, ex-refinancing) fell 2.4% in the month. This follows a 6.5% fall in March and leaves the total value of housing commitments down 12.1% from a year earlier.

"The largest fall in lending in April was in the established market, where commitments fell 3.5%. Lending for new construction rose 0.9%, while lending for investment purposes rose 1.4% after declines of 8% in both March and February. The share of finance commitments by first home buyers rose slightly to 16.9%, from 16.4% in March. The share of fixed rate loans as a proportion of all commitments fell to 17.5% in April, down from 23.9% in March.

"At a state level, the largest declines in lending in April were in WA (-9.3%), NSW ( -5.4%) and VIC (-3.0%) and in monthly trend terms Queensland (-3.7%), WA (- 3.4%), SA (-2.7%) and NSW (-2.5%).

"The large increase in mortgage interest rates (115bp between November and May) has curtailed housing demand. The sharp slowing in finance commitments signals further weakness in housing activity over 2H08. We expect the residential construction cycle to remain weaker for longer, with any meaningful recovery in activity not expected until the second half of 2009.

"Our own modelling highlights that mortgage equity withdrawal is a significant driver of the consumption cycle. In this regard we view the ongoing weakness in housing finance as significant. If housing finance remains at current levels, mortgage credit growth looks set to breach multi-decade lows and on our measure, it appears that the household sector may move into an environment of mortgage equity injection for the first time this decade.

"In an environment of flat house prices, falling housing turnover, slowing credit growth and low auction clearance rates, it appears that consumption is set to slow even further. Notwithstanding the ongoing escalation of inflationary pressure, we continue to believe it is more likely that rates will remain on hold in 2008."

No joy for housing, or for affordability in that outlook.


 

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