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.
Approvals for apartments (dwellings excluding houses) plunged by a massive 44.2% year-on-year.
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.
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.
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.
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.
We maintain a low exposure to Australian equities, at 20% of portfolio value, because of our bearish outlook.

Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.