Balancing the numbers… can Australian Growth match expectations?

The housing finance numbers have been released this morning and they were pretty good it must be said in terms of the sheer size of the outturn with a rise in the number of home loans for the month of April of 4.8% from the previous month’s -1.5%. Investment lending was down and the overall non-refinance number was up 3.4% month on month.

So no quibbling, good numbers – at least seasonally adjusted. But the trend estimates were all down.

Now, there is nothing wrong with looking at seasonal adjusted numbers from month to month, particularly with a data series which is associated with property and housing because we know just how seasonal that market is. But we prefer to look at trend series for a long-term  view of things and to wash out monthly volatility. Clearly there are problems with this approach as trends will lag turning points but from our point of view we prefer to focus on the trend but note the seasonally adjusted numbers. So we’ll be watching the next couple of months numbers to see if there has been a change in trend. It would be a good thing for the economy if the recent falls flatten out and start to rise because housing is so important on so many levels but particularly for indications about renewed economic activity and listed ADI valuations. So we’ll watch this space.

Which moves us onto a further discussion about the outlook for growth embedded in the RBA’s Statement yesterday. Now we could get blindsided by the minutes in two weeks like we did after the May meeting but we doubt this will be the case this month given that the S0MP was so aggressive and they had the opportunity to reinforce its message yesterday.

Below is a piece put together by myself and one of our team which feeds off my discussion yesterday about the seeming impossibility of the RBA hitting its growth targets from the SoMP in May.

Yesterday’s softer statement from the RBA has left the punditry in even more of a bind than before the meeting as they remain torn between what they think the RBA wants to do and what the RBA should do. One additional piece of information contained within this month’s statement, which we feel will have significant implications for the timing of any further rate rise, was that the comment that the,   

“resumption of coal production in flooded mines is taking longer than initially expected”

What makes this so significant is that the RBA had not expected growth to fall so far in Q1 and the punditry is expecting a significant snap back in GDP driven by a resumption in coal exports and other flood interrupted economic activity over the second quarter and the remainder of the  year which will boost growth substantially.

Remember that mining on its own accounted for half the fall in GDP in the first quarter.

So what kind of bounce in Q2 GDP would it take over the next quarter for GDP to hit the RBA’s forecasts contained in the May Statement on Monetary Policy? Taking into account that the Q2 2010 growth number of 1.4% drops out when this quarters growth is added for the year on year outcome based on our calculations an increase in growth of around 2.9% for the quarter! Now years of doing this and studying economics and markets tells us, like Sean Connery, to never say never but the last time we saw quarterly growth of this magnitude was Q3 in 1983 before the dollar floated. So while we agree that mining will recover somewhat it won’t all be in one-quarter so it is hard to see how we can get such a big bounce back and where it will come from.

On the first point the ability to play catch up for the stoppages that occurred during the floods relies both on the speed at which the mines come back on-line and the ability of the relevant port to increase throughput at the docks. So there are capacity constraints to how quickly exports can bounce back in Queensland following the flooding earlier this year. As we can see from the chart below, exports from Gladstone in QLD were running around 40% below capacity during April, meaning there is significant room for additional exports if the port were to run at full capacity. However given that the port can only run at capacity, not above capacity the level of exports can only return back to the previous levels experienced before the flooding, meaning that lost ground in Q1 cannot be recovered.

Of course the ports ability to run at or near capacity, requires an adequate supply of coal, and according to the RBA in yesterday’s statement this supply is taking longer than expected to come back on-line. Going into further detail and after consultation with industry contacts, we found out that one of the biggest operators in the flood effected region is BMA which is a jointly owned venture between BHP Billiton and Mitsubishi Development Pty Ltd.   According to BHP’s website,

 “BHP Billiton Mitsubishi Alliance (BMA) is Australia’s largest coal miner and exporter, and the world’s largest supplier to the seaborne coking coal market” primarily from the Bowen basin with seven sites and “Our mines have a combined production capacity of more than 58 million tonnes per year”.

Given that the Gladstone port has an annual capacity of only 75 million tonnes per year, this makes BMA a significant player. In BHP’s latest production update for the 9 months to March 30 this year you can see that production is down significantly:

This dip in production is also likely to persist for some time with the production report saying (our bolding):

“The Bowen Basin has been significantly affected by persistent wet weather for a large part of the 2011 financial year that continues to delay recovery efforts, particularly for the large open cut operations. At Queensland Coal (Australia), resultant in-pit water accumulation has severely restricted overburden removal and broader mining activities. Force majeure remains in place for the majority of our Bowen Basin products with production, sales and unit costs likely to be impacted, to some extent, for the remainder of the 2011 calendar year.”

So the bounce back in coal exports is will be  limited by the ports capacity to actually get the coal onto the ships and with production unlikely to be restored for the remainder of the calendar  year the snap back in GDP is likely to be much weaker than many are anticipating, meaning we are likely to see the RBA forced to downgrade their current growth forecasts.

We think that yesterday’s Statement was the first step in that process. We await the minutes on Tuesday June 21st for a fuller understanding of the discussion


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