Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.
This week: US GDP data points to a US rate rise in December, and Australia’s housing affordability problem won’t be helped by current declining building approvals.
In last week’s Vital Signs I noted that, although plenty of pundits seem to think a December rate hike by the US Federal Reserve is a lock, the intervening data would be very important.
With the most recent US GDP growth figures, it looks like the jury is largely in. Third-quarter GDP growth was revised to an annualised rate of 3.2% on a seasonally adjusted basis. Consumer spending was a key component, with personal consumption up 2.8%. That indicates some underlying confidence that bodes well for future growth figures.
Adding to that, the Markit Flash US Services PMI Business Activity Index was at a preliminary 54.7 in November, almost the same as the 54.8 in October. This is the ninth consecutive month of an expansionary purchasing managers index. It’s a further sign that inventories are being worked down and assets put to productive use.
Absent some other negative news, it will be hard for the FOMC to resist raising rates at their December meeting.
Here in Australia, the ABS released figures on Wednesday showing another decline in residential building approvals – the third in as many months. Year-on-year approvals are down about nearly a quarter. That signals an uncomfortable dent in confidence, apart from in and of itself being a A$1.5 billion drop in economic activity.
In a further sign that any cyclical upturn in residential construction looks to have come to an end, new home sales were down 8.5% in October, with the Melbourne market a key driver. Interestingly, this was not just a product of the much-vaunted boom in Melbourne apartment construction: multi-unit sales were down 9.2% nation-wide, but detached houses were down 8.2%.
Combined, this will do nothing to help the housing affordability crisis Australia has been facing for some years now. That crisis led to NSW Planning Minister Rob Stokes breaking ranks with the federal Liberal Party in suggesting that negative gearing reform should be considered as part of the solution to the housing crisis. That could not be written off as a slip of the tongue after Premier Mike Baird reiterated the sentiment in his remarks to the National Press Club on Tuesday.
My stance on the matter is well known to readers of this column, given my report for the McKell Institute 18 months ago, advocating the gradual elimination of negative gearing for existing properties. I didn’t fire the starter’s pistol on negative gearing reform, but, to push the athletics analogy, it’s beginning to look like I rang the bell for the last lap.
G20 country focus: Italy
Like much of the Eurozone, Italy is teetering on the precipice of a Japan-like deflationary spiral, with inflation at -0.2%.
It shares a high unemployment rate with many other European countries. Italy’s is at 11.7%, while its youth unemployment rate is a staggering and alarming 37.1%. As I wrote about France last week, that’s simply not compatible with the social compact of a liberal democracy in the medium term.
Italy’s balance sheet doesn’t look much better. Italy’s debt/GDP ratio is 132.7%, the fourth highest in the world, which leaves little wiggle room with its budget deficit of 2.6% of GDP. That has been improving since the financial crisis, but balance is still far from in sight. And because Italy is in the euro zone, it cannot simply inflate its debts away.
In many ways, Italy is the poster child of the European dilemma. It entered into a currency union without becoming part of a fiscal union. It is stuck with the euro, but it would be calamitous to go off it.
No wonder, then, that there is a referendum this weekend to consider amending the constitution to try to reduce the power of the Senate and reduce gridlock. Prime Minister Matteo Renzi, a pro-European, has essentially staked his reputation on it.
Should it fail to pass, there is the very real possibility of a Grexit-cum-Brexit moment in the weeks to come.