Floods disaster dents confidence

From

Consumer sentiment

  • The Westpac/Melbourne Institute index of consumer confidence fell sharply in the latest month as the flood disaster in Queensland impacted sentiment. The index fell by 5.7 per cent to 104.7 in December.
  • Excluding Queensland, confidence levels fell 3.2 per cent.
  • The January seasonal factors exacerbated the slide in confidence. In fact in original terms confidence levels rose amongst females while males were gloomier.

What does it all mean?

  • There is no doubt that the sharp slide in consumer sentiment is almost wholly due to the flood disaster across the nation. In particular the destruction wreaked by the floods in Queensland has had a profound effect on all Australians. Consumer sentiment fell by 5.7 per cent, marking the biggest monthly slide in eight months. Interestingly once Queensland is taken out of the survey, sentiment still fell a substantial 3.2 per cent. Even the sustained improvement in equity markets was unable to curb the sharp slide in confidence levels.
  • One point to note is the seasonality of the data. January tends to be a more positive month for sentiment, given the festive and holiday season. However this time around sentiment fell rather than rose thus exacerbating the size of the decline in seasonally adjusted terms. Hence a fall of around 1.4 per cent in original terms became a more significant 5.7 per cent decline in seasonally adjusted terms.
  • In fact when you look at the data across the age groups, the falls look much more modest, with the 25-44 age group actually recording an increase in confidence. Even when you look at the result across gender, female respondents actually noted a pickup in sentiment levels while males were gloomier.
  • The overall level of pessimism in the latest result would normally not bode well for consumer activity. However this time is different, especially given the massive rebuilding phase in Queensland that will take place in coming months.
  • Looking forward retailers will still need to discount in the near term but it is likely that the worst is behind – especially for some of the Queensland retailers. The other good news is that it is looking more likely that the Reserve Bank Board will be sitting on its hands until mid 2011. Interest rates are already modestly restrictive and there are good grounds to argue that the last move to a tighter monetary policy was a little premature. The Reserve Bank would be best served by allowing confidence and spending to repair. The strength in the labour market is also a positive and likely to drive spending in the midterm.

What do the figures show?

Consumer sentiment

  • The Westpac/Melbourne Institute index of consumer sentiment fell by 5.7 per cent in January to 104.6 after rising by 0.3 per cent in December. The index is now down 12.9 per cent on a year ago.
  • The current conditions index fell by 3.2 per cent, while the expectations index fell by 7.5 per cent.
  • Four of the five components of the index fell in January:
  • The estimate of family finances compared with a year ago fell by 2.1 per cent;
  • The estimate of family finances over the next year fell by 5.6 per cent;
  • Economic conditions over the next 12 months was lower by 15.7 per cent;
  • The measure of economic conditions over the next five years rose by 0.2 per cent;
  • The measure on whether it was a good time to buy a major household item fell by 3.9 per cent.

What is the importance of the economic data?

  • Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.

What are the implications for interest rates and investors?

  • The rate hikes over the past year are having a profound impact on consumer spending patterns. The housing sector is cooling while businesses continue to highlight weak trading conditions. CommSec believes that the next interest rate hike is unlikely to take place until April 2011.
  • Looking forward, it is clear that Aussie consumers are holding on to their conservative attitudes and any further talk of rate hikes will be detrimental to modest improvements in levels. Interest rates need to remain on hold for an extended period to tempt consumer to part with their cash.
  • Retail discounting will continue to be a theme in coming months to generate interest. However the outlook for retailers is likely to modestly improve as activity levels pick up. In particular the massive rebuilding phase that willtake place in Queensland will boost spending across an array of sectors.

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