-Ben Jarman, JP Morgan senior economist
Australia's construction sector is likely to expand at a solid pace in the coming months, with building approvals continue to increase at a double-digit pace in May. According to the Australian Bureau of Statistics, 19,414 new dwellings were approved for construction in the reported period, marking a 2.4% growth from a month earlier, when building approvals fell 5.2%. The reading overshot economists' expectations twofold. Measured on an annual basis, dwellings approved for construction surged 17.6% in May, accelerating from 16.3% in the preceding month. A record $57.6 billion of new homes were approved to be built in the past 12 months, meaning that over 200,000 dwellings are expected to be constructed across Australia this year. In May the Reserve Bank of Australia made its second interest rate cut so far this year, trimming the official cash rate to a record low 2%. By loosening monetary policy, the central bank is trying to offset a precipitous slowdown in mining investment by fuelling growth in other sectors of the economy. Housing and construction are typically the main beneficiaries of such a policy adjustment, with lower interest rates making housing more affordable for Australians, and the relative returns on housing investment higher. Australia's construction industry has boomed over the last few years after the RBA began cutting interest rates, with investors withdrawing money out of the mining sector and flooding it into the construction sector.
© Dukascopy Bank SA