Saturday, November 26, 2011

Building Approvals Foreshadow Recession

Australian building approvals foreshadow recession within about 6 months unless there are significant changes to policy settings in the next 3 months.

Note that the fall from the peak of monthly approvals figures in August 09 to September 2011 is almost 40%

The fall in the 12 month moving average from the peak in June 2010 to September 2011 is almost 15%, but most of this fall had taken place by January 2011. But allow for inflation of 3% pa and the fall in real value of 12 month average of approvals is probably 18% over the 15 months of the fall.

That must translate into lower construction and building supplies employment. Then there is the flow through into discretionary spending, retail employment, mortgage stress not fixable by interest rate cuts - all these lead towards recession and the lead time now might be as little as 3 months, given the timing of the majority of the fall in the average being already 9 months old.

Also note that 7 of the last 12 months were below the current average and 3 of the above average results included in calculating the average wash off over the next 3 months, suggesting the average will likely move lower over the next 3 months, meaning the inflation adjusted average fall at end December 2011 will likely be in the order of a 22% fall from the peak.

With a poor international outlook due mainly to Europe, tight credit parameters, high interest rates still (one cut isn't that much of a difference), and low confidence (ameliorated slightly by the change in easing stance), a greater than usual proportion of these approvals may not have translated into starts within the normal time frames and conditions are such that they may continue to be delayed further.

It is hard to see how these reduced approvals won't translate into a recession when unemployment increases among construction workers with consequent flow through the building supplies, retail discretionary spending, retail employment and possibly house prices through some increased rate of stressed sales.

The market still seems to be focussed on a resources construction boom, but:
1. isn't a proportion of that in the ABS approval data already
2. isn't some more than 12 months from approval, and
3. doesn't some of it require skills and relocations that may not be available in the domestic market?

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