Preference for bank deposits hits 38-year high

The Westpac/Melbourne Institute index of consumer confidence rose by 1.6 per cent in September to a reading of 98.2. Sentiment levels are up 1.3 per cent on a year ago.

• The majority of Aussies believe that the wisest place for savings is in the bank (39.0 per cent of respondents) – the highest level in 38 years. Next favoured was “paying off debt” (20.4 per cent). Spending any additional savings was only seen as the wisest choice by 3.6 per cent of respondents – the weakest reading in six years.
• Generation Y was surprisingly downbeat. Sentiment in the 18-24 age group slumped by 12.9 per cent in September to an index reading of just 95.3.
• Australian dwelling starts rose by 4.6 per cent in the June quarter. Private sector commencements were up 5.0 per cent in the quarter with house starts down 1.7 per cent and apartment starts up 19.0 per cent. House starts stood at the lowest levels in 11 years in the June quarter.
• Over the year to June, 139,349 dwellings were commenced down 2.7 per cent on the prior year.

What does it all mean?
Welcome to the multispeed economy. Top-line consumer sentiment recorded a modest rise in the latest month, however that is a far as the good news goes. In fact delve into the data a little further and the rest of the results look disappointingly weak.

The recent high-profile cost-cutting measures taken by the mining sector seem to have weighed on consumer psychology, especially when coupled with the ongoing weakness in across other parts of the economy. Given the extent of the fiscal and monetary stimulus over the past couple of months you could argue that sentiment levels should be far higher, but the average Aussie is still not convinced that the outlook is all that rosy.

In fact the latest readings on what consumers would do with any additional savings suggest that consumer conservatism is going ahead in leaps and bounds. Almost two thirds of Aussies believe the wisest place for new savings is in the bank or paying off debt, marking the highest reading since the mid-1970’s.

In addition the amount of respondents that believe that spending any additional savings is the wisest action fell to the lowest reading in six years. It is clear that the ongoing global economic concerns, weakness across an array of sectors and a sluggish labour market are seeing households retreat further into their shell.

Encouragingly real estate is still in favour (although less so than last quarter) – and with rates stable, the jobless rate low, no oversupply of properties and lower house prices over the past year, there are plenty of good reasons to be looking at property.

Why is Generation Y so glum? In the space of a month, sentiment in the 18-24 age grouping slumped by almost 13 per cent while sentiment was flat or a little bit more upbeat across other age groupings. There is no seasonality in the result to suggest that any one reason was responsible for the more downbeat view. But it may be the ongoing sluggishness in the job market is making it more difficult to find part-time or full-time work. But a large portion of the 18-24 age group attend universities and other education centres, so it is difficult to get a handle on the pessimistic result, however it will be interesting to see if the view is portrayed in coming months.

Viewed over a longer-term perspective it is still more the case that confidence is not getting much worse, but also not getting much better. It will take a longer period of global financial stability to calm the jangled nerves of Aussie shoppers.

If anyone has a reason to be glum in recent times, it’s builders, tradespeople and housing dependent business operators. Over the past year it seemed like people preferred to rent, live at home longer or buy existing properties rather than to build. In fact over the year to June just over 139,000 dwellings were commenced – marking the weakest annual result in three years. However there maybe signs that activity levels are starting to turn. Dwelling commencements rose by just shy of 5 per cent in the June quarter, marking the first increase since March last year. And looking forward, the lower interest rates on offer, the best housing affordability in a decade, rising migration and population growth as well as grants and incentives provided by some state governments should support a stronger period of residential building over the coming year.

What do the figures show?
Consumer sentiment:

• The Westpac/Melbourne Institute index of consumer sentiment rose 1.6 per cent to a reading of 98.5 in September after sliding by 2.5 per cent in August. The index is 1.3 per cent higher than a year ago.
• The current conditions index fell by 0.1 per cent, while the expectations index rose by 2.9 per cent.
• Only one of five components of the index fell in September:
  The estimate of family finances compared with a year ago rose by 0.3 per cent;
  The estimate of family finances over the next year rose by 4.8 per cent;
  Economic conditions over the next 12 months rose by 0.6 per cent;
  Economic conditions over the next 5 years rose by 3.4 per cent;
  The measure on whether it was a good time to buy a major household item fell by 0.4 per cent.

Gender & demographics:

• Men (index reading of 101.7) were more optimistic than women (94.7). Young people (18-24 years) were less optimistic in September (index down 12.9 per cent to 95.3). Across the other demographics: 25-44 years, (index 105.1, up 11.5 per cent); 45 years plus (index 93.1, down 3.2 per cent).
• The time to buy a dwelling index fell by 0.3 per cent in September and the time to buy a car index rose by 1.1 per cent.
• Aussie consumers believe that bank deposits are the wisest place for savings (39.0 per cent of respondents) –the highest reading since 1974, followed by paying debt (20.4 per cent), real estate (19.8 per cent), and shares (5.5 per cent).

Dwelling commencements

• The number of dwelling commencements rose for the first time in five quarters, rising by 4.6 per cent in the June quarter, but this was still 10.8 per cent lower than a year ago. Private sector houses fell by 1.7 per cent to 11-year lows while apartment starts rose by 19.0 per cent.
• In the June quarter starts rose the most in the Northern Territory (up 68.1 per cent) followed by NSW (up 25.9 per cent), Queensland (up 8.1 per cent), and Victoria (up 2.8 per cent). Starts fell the most in South Australia (down 9.3 per cent), followed by Western Australia (down 6.1 per cent), Tasmania (down 5.0 per cent) and the ACT (down 1.0 per cent).
• Over the year to June 139,349 dwellings were commenced down 2.7 per cent on the prior year.

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.
• The ABS figures on dwelling commencements are compiled on the basis of returns collected from builders and other individuals and organisations engaged in building activity. The data is useful in highlighting activity levels in residential construction.

What are the implications for interest rates and investors?

• The Reserve Bank will probably be a bit disappointed at the latest consumer confidence results. There are plenty of good reasons for Aussies to be encouraged by the state of their economy, but we are still seeing the glass as half-empty rather than half-full.
• CommSec expects the Reserve Bank to maintain its easing bias but it may not follow through with another rate cut until later in the year. Europe, the level of the Aussie dollar and the Chinese economic recovery are the key issues affecting interest rate decisions.
• The outlook for retailers is mixed. Consumer confidence is OK without being great, but wages are rising at a faster rate than prices. Add in the fact that unemployment is low, interest rates could be cut again, home prices are lifting gradually, the sharemarket has stabilised and the Aussie dollar is strong. Overall, consumers need to be positive about their finances before retailers can become more confident on future spending.