The Outlook for the Australian Economy and the Victorian Construction Sector

1
The Outlook for the Australian Economy and the
VictorianConstruction Sector
Presentation to The Master Plumbers and
Mechanical Services Association of Australia
Simon Calder Senior Economist 03 9867
0261 scalder_at_aigroup.asn.au
Melbourne 4 September 2006
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Global economic growth remains strong entering
the second half of 2006
Selected Indicators of Global Growth
Source NTC Research
3
and which has contributed to a renewed
strengthening in Australian GDP growth
4
But a continuing rise in the terms of trade has
ensured the domestic economy continues to grow at
two speeds
March Qtr 2006 Est.
Source ABS Cat. No. 5206.0
5
and which appears to have been accentuated by
the impact of recent monetary tightening
6
There are reasons to remain cautious over the
outlook for consumer spending growth

• The positives
• Household balance sheet consolidation, which
  began with the peaking in housing prices in early
  2004, appears to have abated in early 2006.
• Rising equity markets have also underpinned
  continued steady gains in household net financial
  wealth.
• Household income growth remains supported by
  steady growth in employment and real wages.
• Personal income tax cuts and additional welfare
  payments equal to 7 billion in 2006/07
• The risks
• The rise in petrol prices from 1.20/L to 1.30/L
  is equal to a 0.3 percentage point reduction in
  household disposable incomes.
• The recent increase in interest rates rests
  against the backdrop of a record high household
  debt servicing ratio, and potential for renewed
  balance sheet consolidation.

Sources ABS and RBA
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The trade sector also remains a steady drag on
Australian GDP growth
Source ABS Cat. No. 5206.0
8
Other indicators of production re-affirm the
effectiveness of earlier policy tightening in
2006
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and which will likely curtail the tentative
recovery in manufacturing
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While the fundamentals are positive for the
national residential construction sector
11
Affordability will continue to restrain any
cyclical upturn
Australian Housing Affordability Index
Improving
Deteriorating
Source CBA/HIA
12
However, a tight labor market
13
suggests broader wages growth may continue to
creep higher
14
And leave the RBA with a difficult dilemma
RBA Target Range
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Leading indicators of Victorian residential
construction activity remain subdued
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Suggesting a further decline in commencements
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And a further shortening in the pipeline of
activity
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Non-residential building is providing a moderate
cushion
19
But total building activity remains flat
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By contrast, growth in engineering construction
activity remains strong
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With the contribution from the public sector
also poised to strengthen