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.
- Gender & demographics: Men (index reading of 95.3, down 9.8 per cent) are more optimistic than Women (95.4, down 3.6 per cent). Young people (18-24 years) are less optimistic than other demographics, the index was down 19.1 per cent to 90.7. Across the other demographics: 25-44 years (index 94.6, down 10.8 per cent); 45 years plus (index 96.5, down 1.9 per cent).
- Time to buy a home? The time to buy a dwelling index fell by 7.0 per cent in the June quarter to be down 7.6 per cent over the year.
- Wisest place for savings: Banks remain the wisest place to put new savings according to the survey. Overall 29.4 per cent believe the wisest place for savings was in the bank, but it was down 0.4 percentage points over the quarter. Next highest was real estate (24.6 per cent, down 0.9pp), followed by pay debt (16.5 per cent, unchanged), shares (9.5 per cent, up 1.7pp), and superannuation (5.2 per cent, up 1.5pp).
- State sentiment levels: NSW (down 6.7 per cent), Victoria (down 9.1 per cent), Queensland (down 8.8 per cent), Western Australia (down 7.0 per cent) and South Australia (up 2.5 per cent).
Consumer sentiment
- The weekly ANZ/Roy Morgan consumer confidence rating fell by 1.2 per cent to 112.1 in the week to June 7. Confidence is up 9.6 per cent over the year.
- Three of the five components of the index fell in the latest week:
- The estimate of family finances compared with a year ago was down from +5 to +4;
- The estimate of family finances over the next year was down from +23 to +21;
- Economic conditions over the next 12 months was down from -4 to -6;
- Economic conditions over the next 5 years was down from +12 to +4;
- The measure of whether it was a good time to buy a major household item was up from +31 to +38
Key take-outs from the Reserve Bank Governor Speech
Outlook for growth
“Looking ahead, the most recent forecasts suggest that growth rates will be similar to those we have observed recently for a while yet. Residential investment will reach new highs over the period ahead. Household consumption is expected to record moderate growth. With national income growth reduced by a falling terms of trade, this requires a modest decline in the saving rate. It doesn’t seem reasonable to expect much more from consumption growth than that.”
Resource investment
“Resources sector investment has a good deal further to fall yet over the next two years. Other areas of investment seem very low and while I would have expected that by now these would have been showing signs of strengthening, the most recent indications are for, if anything, a weakening over the year ahead.”
Fiscal policy
“If I am correct about this, it really is very important that other policies coalesce around a narrative for growth. In this regard, I think the Government is on the right track in not seeking to compensate for lower revenue growth by cutting spending further in the short run. Of course, some resolution of long-run budget trends is still going to be needed to sustain confidence and that will not be an easy conversation.”
Household balancesheets
“There isn’t much cause from research, or from current data, to expect a direct impact on business investment. But of all the three broad sectors – households, government and corporations – it is households that probably have the least scope to expand their balance sheets to drive spending. That’s because they already did that a decade or more ago. Their debt burden, while being well serviced and with low arrears rates, is already high.
Monetary policy effectiveness
“It is for this reason that I have previously noted some reservations about how much monetary policy can be expected to do to boost growth with lower and lower interest rates. It is not that monetary policy is entirely powerless, but its marginal effect may be smaller, and the associated risks greater, the lower interest rates go from already very low levels. I think everyone can see that.”
Need to drive infrastructure
“Infrastructure spending has a role to play in sustaining growth and also in generating confidence. I am doubtful of our capacity to deploy this sort of spending as a short-term countercyclical device. The evidence of history is that it takes too long to start and then too long to stop. But it would be confidence-enhancing if there was an agreed story about a long-term pipeline of infrastructure projects, surrounded by appropriate governance on project selection, risk-sharing between public and private sectors at varying stages of production and ownership, and appropriate pricing for use of the finished product… We could unleash large potential benefits that at present are not available because of congestion in our transportation networks.”
Further rate cuts
“We remain open to the possibility of further policy easing, if that is, on balance, beneficial for sustainable growth”
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 low rate environment will continue to support confidence and activity levels over the medium term. But the Reserve Bank has highlighted the need for businesses and governments to step up to drive growth.
- CommSec expects no change to interest rate settings in coming months.