New data released today sends mixed signals about the state of the economy: credit growth has come off the highs of 2003 to be running at 0.9% in July; while new house sales have surged from their lows, rebounding by 17% over June and July.
Westpac senior economist Andrew Hanlan says the slowdown in the pace of credit growth reflects some "cooling" of housing as well as mediocre business credit growth this year (up by 0.4% in July and 7.9% over the year). Personal finance grew by 0.7% in July, down from 1.1% in June, taking the annual grow rate to 13.4%.
He says credit expanded by 14.3% over the past year, a pace well in excess of the 7% annual expansion of nominal economic activity.
"Of some comfort, the growth pulse is heading in the right direction - with monthly credit growth of 0.9% in July down from the 1.3% average over the second half of 2003. This slowing is evident in housing credit - with 1.2% down from 1.7% the respective figures," he says.
"However, with new lending for housing running at $11.6 billion in June, housing credit is likely to remain excessive. The RBA will be looking to July housing finance figures - hoping for the correction process to continue. Estimates suggest monthly housing finance closer to $9 billion is more sustainable.
"We suspect that finance will prove more resilient than this, with the now distance interest rate rises of 2003 losing their sting."
Hanlan says the 17% surge in new house sales over June and July "adds weight to this view".
Strengthening house sales - up by 2.7% in July and 13.5% in June, but still down by 14.5% over the year - provide further support to the prospect of a "mild" construction downturn relative to past cycles, he says.
"The latest data from the Housing Industry Association, based on a sample of new house sales by the largest builders, provides positive news on the housing outlook," Hanlan says.
"House sales appear to be on an upward path again. Smoothing the figures, using a three-month moving average, we find that sales have been trending higher since April - after falling 24% from mid-2003.
"The rebound in new home sales suggests that leading indicators for the housing construction sector will also begin to recover. Although, the pace and timing of this improvement may be uneven by state. To date, the strengthening of home sales has been confined to Queensland and Western Australia.
"Given the lags between home sales and approvals, as well as recent developments in housing finance, we would still expect dwelling approvals data to show some further near-term falls in the private house segment, possibly in the order of 5% or more.
"However, the key issue is that the prospect of a substantial second leg down in the housing market is looking unlikely."
To read a detailed analysis of the outlook for both the property market - as well as the broader economy - see the October edition of QB magazine, which will report on the latest forecasts from respected economic forecasters BIS Shrapnel. Call Ryan McFadyen on 1800 649 578 or email rmcfadyen@pubserv.com.au to subscribe to secure your copy.