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Friday, 28 June 2019

Infrastructure dunked

Public works slow

The mining construction boom came to an end in 2012 and was replaced by a surge of dwelling investment and then infrastructure spend, but this now seems to have run out of puff too. 

Engineering construction activity for the public sector plunged 16 per cent lower year-on-year, and with renewed mining investment not showing up total activity suffered double digit falls over the 12 months to March 2019. 

With the honourable exception of Tasmania, there were hefty falls across the board.

Quarterly activity of $3.3 billion in Western Australia was the lowest since 2005, and way down from a peak of more than $13 billion in 2012. 

Activity in the Northern Territory has almost totally ground to a halt post-Ichthys. 

The results for each of the three main states were solid, yet even here the smoothed trend now points to a slide.  

Overall, not good.

RBA to hit pause?

Analysts are divided on what comes next for interest rates: another cut in July or 'wait and see', Mr. Micawber style, in the hope that something will turn up?

It's not entirely clear what might turn up with housing starts declining and job advertisements now in decline; futures markets are implying about a 70 per cent chance of a July cut at the time of writing. 

Policy makers have gotten into something of a bind. 

Inflation remained well below the target band through 2016 and 2018, but the Reserve Bank didn't take the cue and instead opted for a mantra of stability and confidence. 

It seemed to be working initially, but the housing downturn has since begun to bite. 

Nobody can say for sure where NAIRU is, but given the abject lack of inflation it could feasibly be at 4 per cent or lower.

This in turn implies that between 100,000 and 200,000 Aussies might be unnecessarily idle, sacrificed on the altar of financial stability. 

So that's clearly my argument for a cut, but what about...

Something that might turn up?

Behind the scenes 3-month rates have been tracking at close to record low levels (both 3-month and term are where Aussie banks hedge, fund, and borrow, while deposit flows have been strong). 

This is some welcome news as it allows banks breathing space to reduce mortgage rates on new loans. 

The Bank of Queensland will unleash a 3 year fixed rate mortgage product for owner-occupiers at 2.99 per cent through broker channels, presumably effective next week. 

Source: BOQ

BOQ subsidiary Virgin also just announced a 3 year fixed rate product for owner-occupiers at 2.99 per cent, for loans up to 90 per cent LVR, effective today (June 28). 

And UBank will also introduce a 1 year fixed rate mortgage of 2.99 per cent.

Tax cuts and very low inflation should assist household cashflows as nominal wages growth recovers.

So there's your case for 'wait and see'.

It will be interesting to monitor the broad money growth figures at the end of the month for any further signs of a lift.