|
|
Positive Jobs data masks the challenges ahead.
Monday, 10 August 2009The latest unemployment data released this week indicates that job losses so far in this downturn are lower than expected. In fact economists are progressively reducing their expectations for peak unemployment. Few are still forecasting 8.5%, and some are even forecasting unemployment to only reach 6.5%. Is this too optimistic?
There is good news everywhere. Most recent indicators show an improved outlook.
Employers actually hired an additional 32,200 employees in June. Confidence is improving. The Westpac Melbourne institute consumer confidence index released this week is expected to show this trend continuing.
House prices increased at around 4.2% for the last quarter, after stagnating or falling over the previous twelve months. Growth statistics for the Chinese economy are also released this week and should show around 8% growth, evidence that the Chinese stimulus package is working. This in turn is pushing up Australian mineral exports, and increasing commodity prices. The share market is at its highest level since 2008. Even the
These positive figures have certainly got the popular media saying that the downturn (at least in
With unemployment currently sitting at 5.8% and all this good news why should unemployment increase from here?
The key concern is the falling level of private business investment, now showing up in the statistics. Data for June shows a 6.1% reduction in private business investment. A large portion of private business investment is typically expenditure on construction of apartments and offices.
Latest building approvals data for apartment construction are 38% down on June 2008. Private non-residential approvals have been down all year. During the first 6 months of 2008 private non residential building approvals amounted to $19bn. This has fallen to $13bn for January to June 2009.
This all means that there are fewer new projects to replace existing projects as they end. This lower approval rate will be reflected in reduced private investment in coming months and this could mean higher unemployment especially in the construction and retail sectors.
A major cause of the downturn in private construction is the crisis in finance and the onerous lending criteria making bank finance for development very hard to obtain. See last week's CostWeb for an understanding of how bank lending has changed.
The modest falls in construction costs experienced so far are nowhere near enough to make the feasibilities work given the tight lending conditions, and difficult pre-sales environment. In the private sector detached housing is the only sector showing any signs of recovery. That is fragile at best spurred on by First Home Owners boost.
Furthermore shopping malls, factories, and mines are finding themselves with spare capacity or vacant space and this is indicative of an economy no longer operating at full capacity as was evident back in 2007-2008. Indeed the latest Property Council Office market report indicates that office vacancy rates are now increasing in all states. Why invest in these sectors when there in not yet evidence of sufficient demand?
So as we enter the second half of 2009 we are likely to see a continued fall in private investment. We expect that the government stimulus and infrastructure packages will not be sufficient or soon enough to offset this fall in private investment.
The explanation for the benign jobs data seen so far is shown in the following tables, using data from the Australian Bureau of Statistics. A transition from full time to part time work is occurring. Since January 2009 rather than shedding workers employers are simply giving them less hours of work.
  Unemployment stats show transition to part-time work |
When the recovery comes these same part-time jobs will become full time jobs and hence unemployment rates will not improve quickly.
But employers are also reducing their intake of new hires many of which are school leavers and graduates. This addition to the unemployed workforce will also push the unemployment rate up a percentage point or two.
So for these reasons we must assume that unemployment has further to go, and as the economy recovers in 2010 it will not create many new jobs. At best we expect the recovery to be lacklustre during 2009 and well into 2010.
If that is not enough, waiting in the wings are two further concerns that could undo the recovery so far. We will just touch on them briefly here in the hope that they come to nothing.
The first concern is that global sharemarkets are in danger of overshooting on the upside with share prices moving above fair market value. This situation is worse in
The second concern involves the commercial property sector. Like the housing sector commercial property prices also became overinflated by easy credit during 2006-2008. As overall lease revenues fall (from increased vacancies) the underlying value of commercial property has fallen. However market prices have not yet reflected the downturn in values. Indeed because nobody is buying or selling there are few prices to benchmark against.
Eventually when property owners get into a situation where loans are maturing they may find that they are unable to raise debt and will be forced into a fire sale. Should this experience be multiplied across the markets we could see intense pressure on both the commercial property sector and the banking system. Further bank collapses could occur. Indeed the Fed has now raised the potential overvaluation of the commercial property markets as their number one concern.
On that cheerful note have a good week.
By Gary Emmett
<< Return to News
