Still the RBA has gone to great lengths to express their concern about an Australian economy that is, in their view, operating close to its limits. From Glenn Stevens latest speech (here):

As of today, measures of capacity utilisation are not as high as at the end of 2007, and unemployment is not as low as it was then. Nonetheless, the degree of slack in the economy overall does not seem large in comparison with the apparent size of the expansion in resources sector income and investment now under way.

Most particularly, Glenn Stevens is concerned about incipient wage inflation from a tight labour market:

Re-reading his prepared thoughts, the mining boom casts a long shadow over is thinking.

In short, Stevens infers that the future of Australia is in selling our resources to Asia – he expects resource exports to increase as a percentage of GDP (though he is silent on whether this is via a contraction in real GDP). Secondly, he argues that the multiplier from resource exports is much larger than the bold numbers would suggest. While ‘less than 2%’ of the workforce is employed directly in the resources industry, there are a plethora of suppliers to the sector, we are all investors via our superannuation, and if all that fails there is always what we take in taxes. The trickle down effect to the rest of us is commensurately large.

Even if Stevens concedes that some sectors are doing it tough, it just doesn’t come across as a compelling view for the future of the Australian economy. He suggests that the higher currency is an unavoidable consequence of Asian demand for commodities and the ‘structural’ shift to being a resource exporter at the expense of all other industries is similarly a by-product of being the lucky country.

I don’t get it. It is too simplistic – and bordering on lazy with respect to how Australia could employ its resources to prepare for its future.

But equally, it is an argument that undervalues the sheer weight of money that has been borrowed and then invested in the residential housing sector. This debt burden is real and it is large by global standards.

So if you are of the camp that accepts that house prices, and by extension construction, have been elevated by an expansion of credit – and that this expansion has passed its apex – then anything that weighs on the correspondingly large mortgage pool is simply going to exacerbate an already difficult situation.

While Glenn Stevens is undoubtedly right about the forthcoming bonanza in mining investment, please consider how important housing finance is to the Australian landscape and ask whether this capital boom is really going to save those over-leveraged first home buyers that are a little further from the champagne trickle.

First to the good news – the absolute number of home loans was up in March, though it’ll take more than one month of buying to turn the now well established downtrend in volume.

Putting the change in loan size with recent house price data, it looks like the uptick in the number of loans is a response to lower prices. Note the change in average loan size for first home buyers has been falling since late 2010.

To put this in a wider context, the following chart illustrates just how rare this type of decline has been over the last 35 years. What we are seeing here is the breaking of the leveraged consumption trend that has been with most of us throughout our working lives. If it continues, as I suspect it will, then the ramifications for the Australian economy will be significant indeed.

The changing of the guard is being replicated in various measures of activity in the Australian economy.  With a shorter-period data set, it’s harder to make too much of New Motor Vehicle Sales.  Still looks suspiciously like we are yet to see the low in this most recent rollover in sales volumes…

So while new motor vehicle sales have recovered the magic million mark (from the ABS here):

The trend is sales volumes has turned decidely southward:

Perhaps more poignant for the state of the consumer is the renewed downtrend in retail sales (from the ABS here):

Retail sales are under seige.

1) The Australian consumer has woken to the benefits of online shopping. And while the government might be tempted to fall in behind the persuasive bulk of our major retailers, the sheer magnitude of the efficiency gains offered through the internet mean that the consumer has a good chance of winning this battle. In any event, it is likely to cost more to enforce a widening of GST payable on online sales than it would generate in tax revenue. (Note that the ABS Retail Sales data is based on a survey of 500 large businesses and 2750 smaller businesses – that pay tax in Australia. I’ve asked the ABS how they are going in trying to capture online sales growth – it’ll be interesting to see what they say.)

2) And that is before the deleveraging of the Australian consumer has really begun. Note the growth rate of household debt remains in excess of the inflation rate and most paypackets with average weekly earnings rising 4.7% (ABS trend estimate) in the year to August 2010:

So the cards are really stacked against the retail sector. My guess is that we have already entered a new era in retail sales growth. At best we might match 1.5% p.a. growth rate of the early 80′s over the next decade. Even more likely, a repeat of the early 90′s no growth scenario can be expected for the next year of two.

Conclusion – While valuations have improved in the retailers of late, the dual headwinds of the overleveraged consumer and emergence of online shopping suggest that patience and shot selection will be rewarded for investors in the sector. Likewise, the once impregnable shopping centre property trusts are likely to struggle. Westfield’s recent restructure is as good a sign as any that even the big end of town are worried about these trends – the head trust is certainly more attractive with a reduced weighting to Australian assets but there is no need to jump early on this one.

The ‘low growth’ period spanned the inflationary boom of the late 80′s and the property bust of the early 90′s.  Since then, it’s been a case of sit back and enjoy the ever improving view. Even the GFC was a mere blip on the upward trajectory. But looking at the month-on-month annual growth rates, it’s not hard to see that we could be ready for another bout of lower growth.

Our terms of trade may be grand, the trickle down effect from the commodity industry might be alive and well, and immigration growth may (arguably) remain at 2.5%p.a., but it’s not that hard to imagine that we could be spending a lot more time bouncing around the 0% latitude over the next couple of years.  (Data from ABS here)

Turning to New Motor Vehicle Sales, we only have data back to 1994 – and perhaps not surprising the trend growth rate has been ~3.0% per annum.

The government kick started the recovery in sales with its tax breaks last year and continues to help out with its ‘not-cash-for-clunkers’ scheme.  We had been expecting that sales would trade back to trend, but now that we are here the outlook isn’t so rosy. It’s easy to argue that the best of times are immediately behind the consumer spend sectors of the Australian economy.  (ABS New Motor Vehicle sales release here)

Banality is my middle name – or is it their middle name – it is ABS after-all? (There’s a conspiracy theory in there somewhere – the Freemasons do Kabbalah with Australian statistical data. Okay, where did I leave my pills…)

In any event, the data looks pretty benign. Let’s put it in a legible form:

Looking to the 12 month rolling average, that removes any seasonality effects, new motor vehicle sales have recovered much of their lost ground since the last peak in 2007. Some of this may have been the result of government incentives flowing through but it’d be reasonable to assume that volumes have reverted back to ‘normal’ levels by now. This view is borne out by the following chart that maps total sales on a 12 month rolling basis:

It’s not at all surprising that the volume of new car sales has broadly tracked Australia’s population growth rate. Of course, this chart doesn’t talk to the value of car sales (a Porsche dealership would be feeling very different about the world today compared to 3 years ago). Still, it makes an interesting comparison when compared to what has happened in the housing industry.

Sales of new vehicles have proven resilient having now recovered to their long term growth rate.  Notably, the month of May was up 18% on the same month last year.  For the last 12 months we have now officially passed back through the 1.0 million units sold.

Looking into the sustainability of the trend, looks suspiciously like the growth rate has peaked.  This makes intuitive sense.  Tightening credit conditions would suggest that the above trend growth rates of recent years will be hard to replicate.  If we can sustain population growth around 2.5% per annum, then would expect the motor vehicle sales to gravitate to around this level perhaps?

What we have here is the ‘seasonal adjustment’ factor at work.  See under our methodology we had our jump in March (see here).  Using original flows as the source data, and seeking to smooth for seasonality by using a rolling 12 month period, we get the following:

So while total sales for the last 12 months fell just short of the magic million mark (993,671), and did indeed rise against the previous month (976,185), they rose at a slower pace.  Knew there was a reason why we used this measure.

Still let’s not quibble about timing.  The real question is ‘what can we expect from car sales going forward’?

It’s all a matter of perspective I guess.  From where I sit, we are still looking to find the ‘new’ sustainable growth rate for car sales – cause without the debt crutch, it sure as hell is going to struggle to replicate the previous decade.

But remain below trend on a trailing 12 month basis.

While March is a seasonally strong month for new car sales, it does appear that sales are recovering towards their longer run trend (annualising the last quarter’s sales would suggest a run-rate of around 1 million).  I’d expected more of a depressing effect from the ending of the government’s stimulus…

Next question then is – what is the sustainable growth rate from here on out?  If we are to deleverage, 3.4% might be a bit of a stretch.

While they remain well off their highs, new car sales are proving reassuringly resilient suggesting that the consumer is feeling pretty comfortable with the economic outlook. In the context of the longer term picture, sales growth sits above the long term average growth rate.

One could argue that this is partly due to the rolling off of the lows in sales that occurred during the height of the crisis (January 2009 was a particularly bad month).  Equally the government hand-outs from mid 2009 may artificially inflate the current 12 month average.  Either way, the question is whether we have reached a sustainable level of monthly sales at around ~80,000 per month?

I’m a little surprised that sales managed to hold up as well as they did – held up in a relative sense by passenger vehicles:

The 12 month average is still heading higher pulled up by last year’s efforts (we use the 12 month average to strip out seasonality).  It’ll take a few months of puddling along before the average will respond, that’s why our preferred indicator is the rate of change in the average and, no surprise, this has topped.

The government’s spending in this sector is done.  Any economic benefits that accrued have been spent.  Now it’s back to business as usual (less the cars that were bought last year ahead of schedule).  There ain’t any good news coming from here.