ASX: Falling approvals and construction warn of a slow-down

Australian building approvals for July 2019 show a sharply contracting economy. Housing approvals fell by 16.6% on a year-on-year basis and are approaching the 8000 level breached in earlier crashes.

ABS: Australian Building Approvals: Houses (SA)

Approvals for apartments (dwellings excluding houses) plunged by a massive 44.2% year-on-year.

ABS: Australian Building Approvals: Dwellings Excluding Houses (SA)

The massive contraction in approvals is likely to impact on construction work in the months ahead. Unless we see a similar spike in public sector spending to the 2008/2009 global financial crisis, we are likely to experience a similar contraction to 1988-1990 or 2000-2001. Cutting interest rates, as RBA governor Phil Lowe has repeatedly warned, is not enough.

ABS: Australian Construction Work Done - Chain Values (SA)

Unfortunately infrastructure spending in 2008/2009 was not particularly well-directed, increasing public debt without corresponding productive assets to show for it. The NBN has had a few teething problems but made a lot more sense than the school halls and pink batts programs: it produces income (or can be sold) to offset the impact of the debt.

Construction contributes about 15% of national GDP and a sharp downturn could bring us precariously close to negative GDP growth.

The boost from bulk commodity prices is fading, with iron ore edging downwards after a sharp fall. This is a continuation pattern and we expect the decline to continue, with a short-term target of $80/tonne.

Iron Ore

We also retain our bearish outlook for the financial sector. Banks face headwinds from falling new housing starts as well as from narrow margins as the RBA cuts interest rates in an effort to stimulate the economy. Expect another test of primary support at 5400.

Financials

The ASX 200 is testing resistance at its 2007 high of 6800. A rising Trend Index signals buying pressure but we remain cautious because of the headwinds facing the domestic and global economies.

ASX 200

We maintain a low exposure to Australian equities, at 20% of portfolio value, because of our bearish outlook.