Sliding $A hurts confidence; RBA focus shifts to infrastructure

Consumer confidence; Consumer sentiment:

• The Westpac/Melbourne Institute index of consumer confidence fell from a 16-month high, down by 6.9 per cent in June to 95.3. The confidence index is up just 2.3 per cent on a year ago. A reading of 100 is the dividing line separating optimism from pessimism.
• Wisest place for savings: Aussie consumers still believe that the wisest place for savings is in the bank. Overall 29.4 per cent believe the wisest place for savings was in the bank, followed by real estate (24.6 per cent), followed by paying down debt (16.5 per cent).
• The biggest slide in confidence was amongst the 18-24 year demographic (index down 19.1 per cent). The survey was conducted June 1-7.
• The weekly ANZ/Roy Morgan consumer confidence rating was unchanged at 113.5 in the week to May 31.
• The Reserve Bank Governor has delivered a speech at the Economic Society of Australia luncheon in Brisbane. The Governor took the opportunity to discuss the need for governments to drive infrastructure projects. “It would be confidence-enhancing if there was an agreed story about a long-term pipeline of infrastructure projects”.
• The tone and comments from the speech are consistent with CommSec’s view that the Reserve Bank maintains an implicit easing bias. “We remain open to the possibility of further policy easing, if that is, on balance, beneficial for sustainable growth”.

What does it all mean?

• It is rare that both consumer confidence readings are released on the same day. But they are both confirming that the lift in confidence in May has all been eroded in June. Consumer confidence took a deep slide despite a rather healthy fundamental outlook. Consumer sentiment is now holding at 5-month lows according to the Westpac/Melbourne Institute survey. While the Roy Morgan weekly reading is holding at a one month low.
• From a broader sense, confidence levels are ok without being great. It seems the political environment and falling Aussie dollar were the key dampeners on household confidence. The discussion of the ongoing slide in the Australian dollar was the key factor. The Australian dollar has fallen from US80c to US76.5c over the past month – clearly sapping spirits. In addition the biggest slide in confidence occurred amongst young people (18-24 years) compared with other demographics, the index was down 19.1 per cent to 90.7 – potentially driven by the currency impact on online purchases. Consumer’s news recall on topics was dominated by economic conditions and the Federal budget.
• The ongoing lift in fuel prices across capital cities seems to have had a dampening effect on confidence levels. The national average price lifted by 5 cents in the past month and is now holding at a 6-month high. Not only is the slide in the Aussie dollar making fuel more expensive but it is also increases the cost for household. For Aussie consumers, a stronger Aussie dollar means increased purchases on the internet and trips abroad, so the sharp drop in the Aussie dollar continues to dent people’s confidence. 
• Where is the wisest place to put new savings? According to the latest survey it’s still keeping it in the bank, Overall 29.4 per cent believe the wisest place for savings was in the bank. Property comes in second place over the past three months, with paying down debt in third place. Interestingly the biggest lift by respondents was to put additional savings in the share market. Certainly the recent slide in markets has provided potential investors with more value.
• The Reserve Bank Governor has delivered his clearest statement yet that the Reserve Bank has pretty much done all the heavy lifting it can to drive growth. Interest rates are super stimulatory, the benefits from further rate cuts are limited in terms of effectiveness, and the governor believes that the household sector cannot be relied upon to drive growth – given they have the “least scope to expand their balance sheets to drive spending. That’s because they already did that a decade or more ago.”
• In fact the Governor took the speech as an opportunity to discuss the need for a lift in business and government partnerships to drive infrastructure growth – particularly in the current low rate environment. Not only will it build capacity in the longer term but as the Governor pointed out it is “confidence-enhancing” and will support an array of sectors from suppliers to financiers while boosting productivity.
• The Reserve Bank would be disappointed in the slide in confidence and would be hoping for a rebound. Rates have been cut twice this year, the Federal Budget was rather tame and the resulting lift in confidence has fast disappeared. The key will be for a lift in business investment plans which would support the broader growth story while building future capacity in the economy. And while the Governor kept the door open for further rate cuts CommSec expects interest rates to stay on hold in coming months.

What do the figures show?

Consumer sentiment:

• The Westpac/Melbourne Institute index of consumer confidence fell by 6.9 per cent in June to 95.3. The confidence index is up 2.3 per cent on a year ago.
• The current conditions index fell by 0.8 per cent in June, while the expectations index fell by 11.3 per cent.
• Four of the five components of the index fell in June:
  • The estimate of family finances compared with a year ago was up by 1.6 per cent;
  • The estimate of family finances over the next year was down by 8.9 per cent;
  • Economic conditions over the next 12 months was down by 7.7 per cent;
  • Economic conditions over the next 5 years was down by 17.1 per cent;
  • The measure on whether it was a good time to buy a major household item was down by 2.5 per cent.