Consumers’ inflation expectations near record low – CBA services sector activity hits record low

Consumer sentiment; Services sector

• Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating rose by 0.6 per cent to 114.8 points. Consumer sentiment is above the average of 114.4 points held since 2014 and higher than the longer term average of 113.1 points since 1990.
• Inflation expectations: Consumer inflation expectations over the next two years fell from 4.1 per cent to 3.8 per cent last week – just above the lowest level since records began in October 2014.
• Services sector: The Australian Industry Group (AiG) Performance of Services Index (PSI) rose by just 0.2 points to 44.5 points in February – contracting for a second successive month and remaining near 4-year lows. The ‘final’ CBA/Markit Services Purchasing Managers’ Index (PMI) fell by 2.3 points to 48.7 points in February – the first contraction in activity since the survey began in May 2016. Any reading below 50 indicates contraction.

The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. The services sector gauge highlights conditions in the sector as well as providing guidance on the economy more generally.

What does it all mean?

• Aussies remain a resilient bunch. Consumer sentiment remains above the long-run average with the number of optimists outweighing the number of pessimists. Solid jobs growth, rising share prices and low everyday goods prices are cushioning the negative wealth effect of falling property prices. The Aussie sharemarket (S&P/ASX200 index) finished February up by 5.2 per cent – the best monthly gain since July 2016.
• The Reserve Bank’s shift to a neutral interest rate stance, rising iron ore prices, trade optimism and a lift in bank shares following the release of the Royal Commission have supported the broader sharemarket, despite mixed company earnings results. That said, the survey is likely to become increasingly choppy in the lead-up to the New South Wales state election on March 23. Political events tend to cause large swings in consumer surveys.
• The performance of the services sector, however, is a concern for investors and policymakers. According to the Commonwealth Bank-IHS Markit survey, services activity contracted for the first time in almost three years in February and is now at its lowest level since the survey commenced in May 2016. And the AiGroup’s equivalent gauge contracted for a second successive month in February.
• That said, the Commonwealth Bank survey highlighted that “Although business conditions have worsened, firms remained confident about the outlook from a longer-term perspective. Business expectations over the next 12 months remained buoyant, with 56 per cent of respondents anticipating higher activity in the year ahead. Anecdotal evidence showed that firms expect new marketing strategies, higher sales projections and a wider product offering to boost business activity. However, there were some concerns highlighted by panel members over further changes to banking sector regulations and upcoming federal elections”

What do the figures show?

Consumer Sentiment

• The weekly ANZ-Roy Morgan consumer confidence rating rose by 0.6 per cent to 114.8 points. Consumer sentiment is above the average of 114.4 points held since 2014 and higher than the longer term average of 113.1 points since 1990.
• Three out of five major components of the index rose last week:
  • The estimate of family finances compared with a year ago was down from +6.4 points to +5.0 points;
  • The estimate of family finances over the next year was up from +23.3 points to 29.2 points;
  • Economic conditions over the next 12 months was up from +1.8 points to +2.7 points;
  • Economic conditions over the next 5 years was up from +10.9 points to +11.4 points;
  • The measure of whether it was a good time to buy a major household item was down from +28.2 points to +25.5 points.
• The measure of inflation expectations fell from 4.1 per cent to 3.8 per cent.

Services Purchasing managers’ indexes

•  The Australian Industry Group (AiG) Performance of Services Index (PSI) rose by just 0.2 points to 44.5 points in February – below a reading of 50 (contracting) for a second successive month and remaining near 4-year lows.
• Activity indexes were mixed in February: Sales (down 1.5 points to 37.8 points); new orders (down 6.9 points to 38.5 points); supplier deliveries (up 10.6 points to 50.9 points); capacity utilisation (up 1.6 per cent to 78.4 per cent); employment (up 1.8 points to 49.3 points); finished stocks (up 3.3 points to 55.0 points).
• Prices and wages pressures eased further in February. Input prices (down 3.0 points to 60.2 points); selling prices (down 3.6 points to 43.4 points) and average wages (down 2.2 points to 53.0 points) all fell.
• AiGroup notes: “Retail trade and hospitality were the weakest services sectors in early 2019 as consumer-focused business face increasingly tighter conditions. Services businesses reported weak customer demand in February due to extreme heat and drought conditions in some areas of Australia, flooding in others and a deterioration in consumer spending. The lower Australian dollar increased competition for local businesses and increased costs for those using imported inputs, however some businesses benefited from an uptick in export orders.”
• The ‘final’ Commonwealth Bank/Markit Services Purchasing Managers’ Index (PMI) fell by 2.3 points to 48.7 points in February – the first contraction in activity since the survey started in May 2016. Any reading below 50 indicates contraction.
• CBA notes: “February showed a deterioration in Australian service sector activity for the first time since the survey began nearly three years ago. A decline in new work, linked to droughts and bank regulatory changes, weighed on business activity. Growth in export orders and backlogs also eased.”

What is the importance of the economic data?

• The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a more timely assessment of consumer attitudes and is now closely tracked by the Reserve Bank.
• CBA and the Australian Industry Group (AiG) release surveys on the services sector each month. The Australian surveys are the local equivalents of similar surveys released for other countries. The services sector surveys are useful not just in showing how the sector is performing but in providing some sense about where it is headed. The key ‘forward looking’ components are orders and employment.

What are the implications for interest rates and investors?

• Slowing growth in the services sector is a concern. Both the CBA and AiGroup’s gauges are currently at the lowest levels in more than 3 years, signalling a contraction in activity. That said, the AiGroup’s PSI had expanded for 22 consecutive months through to December – the longest expansion since March 2008.
• And it remains to be seen whether the impact of drought and the overhang associated with the bank Royal Commission continues to weigh on business activity. The Commonwealth Bank’s survey suggests the business outlook remains positive, supporting business investment expectations for the year ahead. The investment data was released by the Australian Bureau of Statistics last week. NAB’s February business survey will be keenly observed when released a week from today.
• Consumers’ expectations for price increases remains anchored near 4-year lows. The benign inflationary environment is an understated support for consumer spending as everyday goods prices – for items such as clothing and household furnishings – continue to become more affordable when prices are compared to wages, as shown in the chart below.
• CommSec expects interest rates to be unchanged for the foreseeable future.