Australian Economy Receptive for now! But for how long?

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Australian Dollar

Australian Economy Fundamental Analysis

Employment rate has remained within the manageable figure of 6%and the employed persons have marginally grown. From June 2014 the employment rate has steadily risen by 1.9% by June 2015. This steady rising employment trend and the unemployment rate graphs clearly show the positive trend. To muster the notion that the economy is moving in the correct direction, the Australian PSI has increased by 1.6 points to 51.2 points from the preceding month. Generally the services sector has remained on a gradual positive trend during the first half of 2015 but some would argue in favor of a neutral bias in the services sector. Sales of services expanded in June after two consecutive months of contraction and the sale sub-index rose by 8.2 points to 53.4 while the input price index eased by another 5.7 points to 61.6 points in June, slightly below a 12 month average of 61.8 points. The retail trade sub-sector also continued its expansion into June.Australian employment Rate

But there are bearish cloud lurking in the distance as the below graph delineates the reasoning. Below graph shows a drop in engineering construction in the mining states. Historically non-mining sector contributed less to engineering works construction. Now with mining states making 60% of the spent contribution, the steepest plunge in iron ore prices in China in 6 years to US$ 44.59/tonne, would have a rippling impact on the Australian exports along with its effects on global commodity prices. Accordingly the consequence of this plunge would have disruptive ramifications on the Australian economy presaging a sudden slowdown on the Australian GDP. Another fundamental problem needing address is the cost base is too high dampening the interest to invest. The IMF points to the prevalent low interest rate as an incentive to invest which would generally alter business capital structure and thus business risk appetite would also need a readjustment which could further delay the investment decision process. Housing boom is also filling in the growth gaps, but again the trend is shifting towards non-housing dwelling i.e., townhouses, flats, units or apartments, while the actual houses being approved is quite stable. While a housing boom may develop, a precipitous increase in non-housing dwellings has the potential to cause a glut in the market which can set the precedent for a housing bubble, another potentially risky phenomenon to contend with. Further Tony Abbott’s approval ratings suddenly dropped by 4 percentage points, places the political landscape into a state of ambivalence, with opposition ratings even lower. This is untimely because now was a time when strong decisions were needed to avail the expansionary monetary policy environment. It was important now to ensure uninterrupted private as well as public investments and address the repercussions of output skewed primarily towards the mining sector. It may just be exasperating to recover from the reverberations experienced from the pernicious fall of iron ore prices in the Chinese stock market and does not really augur well for the Australian economy in the intermediate term even though the above discussed fundamental analysis indexes seem to be heading in the correct direction!Australian economy engineering construction

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