Five economic indicators to watch for the first signs of an Australian slowdown

Traffic congestion in Shanghai. The global price of semiconductors. The number of Australians getting a pay cut.

All of these seemingly unconnected indicators, and thousands more, were contained in the Reserve Bank’s latest statement on monetary policy.

Deserted highways in Shanghai during the city’s COVID-19 lockdown in April. The Reserve Bank tracks traffic activity in Shanghai and Beijing.Credit:Bloomberg

The statement, which runs to about 70 pages, is the bank’s take on the local and global economy while providing forecasts from the RBA’s army of experts on what will transpire over the next three to 24 months.

But why does the Reserve Bank of Australia need to track Shanghai’s traffic issues?

Of what importance is the price of wheat, or the number of people moving into a new job, or even the number of international students currently in Australia that the Reserve Bank and other economic forecasters track?

Each, in their own way, give some insight into a broader economic picture. The traffic jams of Shanghai (and Beijing) shed light on the level of economic activity across Australia’s largest trading partner.

Wheat prices are good proxy for inflation.Credit:AP

Wheat and oil prices are good proxy for inflation. International student numbers can help determine the strength of the local jobs market.

The amount of individual data points collated by the Reserve Bank every three months runs into the millions.

But there is certain information which grabs most attention, from both the RBA and private sector economists, as they can provide the first inklings of a change in the country’s economic fortunes.

These tipping points will mark when the Reserve Bank decides it can stop raising interesting rates. They could, depending on what they show or how quickly they change, force the RBA into reversing what it has inflicted on home buyers and business owners over the past five months.

Here are five of the most important.

Property prices

If cricket is Australia’s national sport, debating the direction of house prices is the nation’s pastime.

Through the COVID pandemic, house values across the country experienced their biggest increase since the late 1980s. The median house value in Sydney, Melbourne and Canberra all surged beyond the $1 million mark.

A combination of record low interest rates, border closures that left people unable to spend their savings, and government programs aimed at propping up the economy lifted prices across capital cities and the regions.

Values, which peaked in the March quarter, are now edging down as the Reserve Bank lifts interest rates, but remain high and many buyers, particularly those wanting to enter the market for the first time, find themselves priced out of bricks and mortar.

The property market gives an insight into consumer confidence, into the willingness of banks to lend money, whether new homebuyers will be hitting the retail sector to kit out their purchases and the overall strength of the construction sector.

AMP’s Diana Mousina says changes in house prices provide good insights into future household spending.

Economists watch not just house prices but also closely connected indicators such as rental vacancy rates (SQM Research this week reported the national vacancy rate at 0.9 per cent, the lowest since 2006).

For the Reserve Bank, property prices can also show if interest rate changes are working.

AMP Capital senior economist Diana Mousina said housing was the single largest source of wealth for households. It accounts for almost two-thirds of total household wealth.

Any change in the value of housing plays into the broader economy via the “wealth effect”.

“The historical relationship between wealth and consumer spending shows that rising wealth coincides with rising consumer spending and vice versa and intuitively this makes sense – when you feel like your assets are worth more, you feel more confident to spend,” she said.

As household spending accounts for about 60 per cent of Australia’s economic activity, any early indicator that consumer expenditure is about to change is closely watched.

Home loans

Closely related to home prices is the number and value of home loans, which can be broken down between those for owner-occupiers and those for investors.

One of the defining features of the pandemic has been the surge in lending for property.

Total lending peaked at $33 billion in January this year, with two-thirds of that by people buying their own piece of Australia while the rest was by investors.

Since then, it has tumbled by 14.5 per cent or more than $4 billion. In July, owner-occupiers borrowed a touch over $19 billion for a home.

Despite the drop, borrowing is still extremely elevated. It has only fallen back to where it was in late 2020 and is well above the levels of the pre-pandemic period. For instance, in July 2019 (when the official cash rate was just 1 per cent), owner-occupiers borrowed $12.2 billion.

Investor borrowing in mid-2019 was just $4.6 billion. It is more than double that today.

Home loans are an early indicator of the impact of interest rate changes and the general state of the economy, particularly construction. If the number of home loans are falling, that suggests the amount of construction work in three to nine months’ time will be easing.

Copper

Another area that many economists and analysts track is the price of copper. It’s so well known as an indicator that many call it “Dr Copper”.

The metal is used extensively in electronics, industry and transport. It is also pivotal in the emerging renewable energy sector that many countries believe will drive economic growth over coming decades.

BHP chief economist Huw McKay, in a speech in Canberra this month, noted there were about 80 kilograms of copper in an average electric vehicle. Solar panels need more than 3 tonnes of copper per megawatt.

Offshore wind plants require a minimum of 6 tonnes of copper per megawatt.

In March, the price of copper on the London Metal Exchange reached $10,730 a tonne ($15,887). By the middle of July, it had tumbled below $US7000 a tonne ($10,364).

So important as an economic indicator is copper, it’s known as “Dr Copper”.Credit:Bloomberg

Close commodity market watchers said the precipitous fall in copper was a clear sign the global economy was on its way to recession. But something has changed over the past seven weeks.

The price of the metal has lifted by more than 10 per cent as markets start to hedge their bets about a global economic downturn or whether it will just be confined to Europe, which is struggling due to the soaring cost of power due to the Ukraine war.

While many commentators believe the inflation dragon trying to be caged by central banks around the world is due to one-off events such as the Ukraine war, McKay cautioned there were longer-term inflation pressures in play.

The surge in renewable energy has increased the demand for a large number of minerals.

Miners have, over recent years, tapped the cheapest, highest quality deposits around the world. As demand for their commodities grow, they will have to recover lower-quality deposits, which will be more costly to extract and process.

“Looking beyond the immediate picture to the medium term, we continue to see the need for
additional supply, both new and replacement, to be induced across many of the sectors in
which we operate,” he said.

“We do anticipate that geologically higher–cost production will be required to enter the
supply stack later this decade.”

New cars

Another tipping point sits in our carports or causes us plenty of angst on the morning commute.

Purchases of a new set of wheels are a good way to get a feel for the performance of the economy.

Last week, data from the Federal Chamber of Automotive Industries showed the largest number of new cars sold in August since 2017.

Despite ongoing supply issues, and higher prices (up 22 per cent on where they were in 2019), consumers opened their wallets to buy 95,256 new cars through the month.

Sales of vehicles priced above $60,000 jumped by 77 per cent, thanks in part to the Tesla Model 3. Purchases of electric vehicles in total are up by 368 per cent so far this year.

Outside the family home, the next largest purchase for most people is a new car.

And sales of new cars track largely in line with the strength of the economy. In 2018-19, ahead of the pandemic, purchases were easing in an early sign the economy was failing to fire on all cylinders.

Barrenjoey chief economist Jo Masters said research by the Reserve Bank showed new cars were one of the sectors most likely to respond to changes in interest rates and the health of the economy.

“New car sales have historically been a good indicator of the wealth effect and will be impacted by higher lending rates but this time it may take longer to flow through as orders are now only just being filled as supply chains ease,” she said.

New car sales are a good indicator of the underlying strength of the economy, access to credit and consumer confidence.Credit:Rob Homer

Full-time employment

The unemployment rate is notorious for being a lagging indicator when it comes to key economic turning points.

That’s due to the way businesses take on staff, which can take several months, and how they often try to cling on to those staff in the face of a downturn.

Full-time employment, however, can give an insight into how an economy is changing. It is a much smaller decision to cut a person’s hours (making them part-time) than to axe them from a workforce altogether.

The success story of the COVID pandemic has been the jobs markets. Since the start of 2020, the country has added more than half a million full-time workers.

The inflation pressures facing the country are partly due to the sheer increase in the number of people with a full-time wage. It’s one of the reasons, so far, that the lift in interest rates has yet to really bite.

When the number of full-time workers start to fall, the Reserve Bank and the federal Treasury know that the economy has turned.

Jobs data this week showed there may be movement around full-time work. In August, there was a solid 58,800 rise in full-time employment, but this was only due to a near 74,000 increase in full-time workers in NSW. The rest of the country lost full-time workers, with Victoria suffering a second consecutive monthly fall.

Outside all of these tipping points there are other indicators that economists and analysts consider.

They include the South Korean share market (the Kospi) which has proven a good indicator of global economic trends. Locally, the ANZ and SEEK measure of job advertisements, the Westpac-Melbourne Institute leading index and various business surveys are closely watched.

Consumer confidence levels are at recession-like levels, but actual spending is at record highs.Credit:Kate Geraghty

Before COVID-19, the Westpac monthly and the ANZ-Roy Morgan weekly measures of consumer confidence were always carefully watched.

Confidence at the moment is around recession-like levels. But consumer spending is at record levels, even taking into account inflation.

And measures of business confidence (and trading conditions) are at levels that would suggest an economy growing at near double-digit rates.

In a speech last week on inflation, Reserve Bank governor Philip Lowe said there were three sources of uncertainty about the economy facing all central banks.

They included how the global economy dealt with issues such as Russia’s invasion and China’s COVID restrictions, whether Australians were becoming accustomed to higher inflation and how local households would respond to higher interest rates.

“It is still difficult to know how all of these factors will balance out, but recent data continue to suggest resilience in consumer spending,” he said.

That data will stretch from the streets of Shanghai to the prices of hundreds of homes at weekend auctions across Australia.

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