What ABS data shows about long-term rates in Australia?

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Long term rates are now well above short term rates, indicating that long term economic prospects are promising. Economic activities are resuming in the country as evident by rising government tax revenues.

Australian Bureau of Statistics (ABS) gave a flurry of economic releases and reported on government finances to dwelling approvals. Over the near term, the incoming economic data will continue to validate assumptions and expectations.

Reserve Bank Governor Philip Lowe Tuesday acknowledged that Australia’s economy was doing better than initially estimated and the employment opportunities were rising. Meanwhile, the RBA is committed to maintain lower funding costs as well as interest rates.

Mass vaccination drives are already underway in many countries, and it is a critical reason behind the recent surge in risk-free rates last week. But risk-free rates are rising since the beginning of the year as humans are gradually returning towards pre-pandemic status quo.

And in Australia, it appears the country is doing better than expected in terms of recovery, according to Governor Lowe. As a result, long-term rates were bound to be higher as they have done since the beginning of this year.

Source: Reserve Bank of Australia (YTD to 1 March 2020)

When the gulf in long- and short-term rates is narrow, it means investors are lacking conviction on the long-term picture of the economy. Similarly, the opposite is true when the gap is wide.

Related: What rising rates mean for your portfolio?

The latest economic releases by the ABS also reflect that the economic recovery is underway. Imports rose during the December quarter and are likely to rise over the near term. The Australian government is running tax incentive scheme on capital expenditure.

Private capital expenditure remains a key contributor to the economy. It is favourable for countries when corporates are investing capital as it has a strong multiplier on gross domestic product. Meanwhile, the household spending has been robust over the past year and the rising employment levels should aid consumer spending.

In the next few months, the probable impact of the outgoing government stimulus package will be evident on the economy. Meanwhile, the resumption of international travel will likely bring numerous positives to the country. 

Iron ore price are likely to weaker over the near term as supply side concerns would fade. Commodity prices are likely to remain strong owing to global economic recovery, especially for industrial commodities and base metals. 

Tax inflow up 16% in December quarter

In the December quarter, the taxation revenue was up 16% over the previous quarter. But the state and local government taxation revenue fell by 2.7%, largely due to various tax incentives underway in the states.

Further, the total gross fixed capital formation rose 2.5% in the December quarter over the previous quarter. These public investments were lifted by the government’s contribution, while Victoria and Queensland recorded consecutive quarters of growth.

Net operating balance during the quarter recovered to nearly negative $40 billion from around $94 billion in the previous quarter.

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Current account surplus at $14.5 billion

Balance of Payments number showed that a robust recovery is underway. Exports of good and service rose nearly $8 billion or 8%, driven by metal ores and cereal grain exports. Meanwhile, imports were up 4%.

Capital and financial account showed a deficit of $10 billion, largely due to a financial deficit of $9.8 billion. In the December quarter, net equity outflow of $34.4 billion and net inflow of debt of $24.6 billion resulted in the aforementioned financial deficit.

Building approvals

In January, the number of dwelling approvals fell 19.4% on a seasonally adjusted basis. Private house approvals fell 12.2% in January after a record last month, but they remain 38% higher than the same period last year.

Private sector approvals excluding houses (apartments, townhouses) fell nearly 40% in January, marking lowest level since January 2012. Dwelling approvals also moderated across the states with the highest monthly in Queensland of 33.3%.

ABS Official Daniel Rossi said the extension and HomeBuilder scheme would provide floor private house approvals over the next months. With lower approvals, the value of total building approvals fell nearly 17% on a seasonally adjusted basis.



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