Australia Home Building Falls, More Rate Cuts Seen

Australian approvals to build new homes registered their biggest fall in six years in November, reinforcing the case for more interest rate cuts as policymakers battle to avoid a recession.

AP

The data, along with the latest trade figures that showed the first fall in exports in nine months, underlined the growing weakness in the economy as the clamp on credit and economic uncertainty overshadowed falling interest rates.

"A shocking result," said Brian Redican, senior economist, at Macquarie. "Policymakers really need to get the housing market moving this year if a recession is to be avoided. These figures just underline the need to keep cutting interest rates to try and get some traction in housing."

The Australian dollar took a knock, falling to around $0.7067 from
$0.7100 just before the data and retreating further from a three-month high at $0.7266 on Wednesday. 

Bond futures recouped losses to edge higher with investors pricing in at least a 75 basis point rate cut when the Reserve Bank of Australia (RBA) meets in February.

Government figures on Thursday showed approvals to build new homes dived 12.8 percent in November, far below forecasts of a 1.0 percent fall. It marked the fifth straight monthly decline and was down 34.7 percent from a year ago.

Forward indicators continue to reflect weakness in the housing sector. A private sector survey on Thursday showed construction activity at new lows in December, pointing to a grim quarter for the sector.

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The economy had ground to a halt in the third quarter, with growth at an eight-year low and household spending static. To jumpstart the economy, the RBA slashed rates by 3 percentage points since September to a six-year low of 4.25 percent, by far the most aggressive easing since the recession of the early 1990s.

The federal government also weighed in with a A$10.4 billion ($7.4 billion) stimulus package, much of which hits wallets just before Christmas.

"It will take some time for the RBA's aggressive rate cuts and the government's tax breaks to work their way through the system," said Su-Lin Ong, senior economist at RBC Capital. 

"There are some tentative signs of policy traction with the first increase in housing finance approvals in October, although a likely weaker labor market hints at only modest recovery in this sector later this year."

Trade Surplus Narrows

In yet another sign that the sharp global slowdown is hurting Australia, exports fell in November, narrowing the trade surplus which had ballooned to a record high in October.

Data showed the trade surplus shrinking to A$1.45 billion from an upwardly revised A$2.96 billion in October and well below analyst expectations of a A$2.0 billion surplus.

Exports of metal ores and minerals fell 13 percent as demand from key markets such as China fell. Steel mills in China and Japan, Australia's two biggest export markets, have slashed production and miners have responded by cutting supply.

"The downturn in global demand will weigh on export volumes going forward, although exporters should, to some extent, benefit from the falling Aussie, which shed 20 percent against the U.S. dollar in 2008," said Helen Kevans, economist at JP Morgan.

"Export volumes are expected to weaken significantly in coming quarters, however, given that we believe the global economy already is in recession."

Australia is a big exporter of commodities and has benefited from huge increases in iron ore and coal prices for annual contracts settled back in April and March while global commodity prices were still red hot.

Since then, however, the world has tipped toward recession and resource prices have plunged. The CRB index of a basket of commodities has sunk more than 52 percent since July and analysts say if demand does not pick up, the major Australian miners face substantial price cuts on contracts next year.

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