Value of loans for home renovations hit record low. Business confidence hits 3-year low

Consumer sentiment; NAB business survey; Lending; Credit cards

• Business survey: The NAB business conditions index eased from +6.6 points in January to +4.4 points in February, below the long-term average of +5.8 points. The business confidence index fell to a 3-year low of +2.0 points in February, down from +3.6 points in January and below the long-term average of +6.0 points.
• Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating fell by 4.6 per cent – the second biggest fall in three years – to 109.5 points. Consumer sentiment is below both the average of 114.3 points held since 2014 and the longer term average of 113.1 points since 1990. Consumers’ views on current economic conditions fell by 7.9 per cent to 94.6 points – the lowest level in 74 weeks.
• Number of home loans: The value of lending to households fell by 2.4 per cent in January after a 3.6 per cent decline in December. Lending for housing fell by 2.1 per cent, investor lending was down 4.1 per cent and lending for owner-occupier dwellings fell by 1.3 per cent.
• Not keen to renovate: The value of loans (to households) for home alterations and additions fell by 0.7 per cent to a record-low $281 million in January.
• Average credit card debt: The average credit card balance fell by $83.38 (or 2.6 per cent) to $3,181.18 in January – a similar decline to a year ago.

The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. The business survey has broad implications for investors and the economy. Credit card data is important for the retail and financial sectors. The lending figures have implications for builders, housing-reliant businesses, finance providers, retailers, and companies dependent on consumer and business spending.

What does it all mean?

• Home renovating reality TV shows beware! The value of lending approvals for home alterations and additions have fallen to the lowest level since records began in July 2002 due to a combination of tightening lending standards, slower home loan approvals (greater scrutiny of household balance sheets), falling property prices and a desire to deleverage. Overall, total lending to households and businesses are near 4-year lows at $66 billion, amid a broader credit squeeze and slowing housing market.
• Aussie business conditions eased in February, led lower by falling profitability and weaker trading. CommSec’s recent research on the corporate profit reporting season concluded that “Corporate Australia is not doing as well as a year ago.” Companies are still making money, but earnings results were mixed. Various management teams cited a confluence of negative influences, including the China-US trade war, slowing global growth, political uncertainty (Brexit and elections), falling property prices, anaemic wages growth/consumer caution and drought.
• The NAB noted that “Forward looking indicators point to an ongoing weakness in business conditions. Confidence remains below average, forward orders are negative and capacity utilisation is trending lower.” That said, businesses recently upgraded their capital spending plans for 2019/20. And the all-important NAB employment sub-index at current levels of 5.4 points in February, is still above its long-run average level of 2.0 points.
• Consumer confidence has softened, but that was expected given the drop in the value of the Aussie dollar last week and negative news flow around slowing economic growth.

What do the figures show?

National Australia Bank Business Survey

• The NAB business conditions index eased from +6.6 points in January to +4.4 points in February (long-term average +5.8 points).
• The NAB business confidence index fell to a 3-year low of +2.0 points in February, down from +3.6 points in January and below the long-term average of +6.0 points.
• The survey was undertaken from February 25 to March 1.
• The rolling annual average business conditions index fell from +14.1 points to +12.7 points in February, below the record high of +17.3 points in June, but well above the long-run average of +5.9 points.
• And the rolling annual average business confidence index fell from +6.6 points to +5.9 points in February, in-line with the long-run average.
• Key Components: The index of trading conditions fell from +10.5 points to +7.8 points; employment rose from +5.0 points to +5.4 points; profitability fell from +4.6 points to +1.1 points; forward orders fell from +2.5 points to -1.8 points.
• Inflationary indicators: The monthly reading of labour costs rose at a 0.8 per cent quarterly rate in February after a 0.6 per cent rise in January. Purchase costs rose at a 0.7 per cent quarterly rate in February after a 0.6 per cent rise in January. Final product prices rose at a 0.3 per cent quarterly rate after a 0.4 per cent gain in January. Retail prices rose at a 0.1 cent quarterly rate in February after a 0.2 per cent rise in January.
• Capacity utilisation eased from 81.4 per cent to 80.9 per cent in February, below the long-term average of 81.1 per cent.
• The proportion of firms reporting that they did not require credit fell from 70 per cent to 55 per cent.
• NAB reported: “Conditions declined in February to below average levels – with profitability and trading now below average. While monthly movements in conditions have been hard to interpret in the early part of the year, this survey is based on a larger sample and surveyed well after the January period and suggests that conditions have materially deteriorated further to below average levels in 2019”.
• “Conditions remain most favourable in the east, though confidence is weakest in NSW and VIC suggesting there might be some further pullback there. In contrast SA and WA see some improvement in train, though are starting from a low base.”

Consumer Sentiment

• The weekly ANZ-Roy Morgan consumer confidence rating fell by 4.6 per cent – the second biggest fall in three years – to 109.5 points. Consumer sentiment is below both the average of 114.3 points held since 2014 and the longer term average of 113.1 points since 1990.
• All five major components of the index fell last week
  • The estimate of family finances compared with a year ago was down from +5.0 points to +2.0 points;
  • The estimate of family finances over the next year was down from +29.2 points to +22.2 points;
  • Economic conditions over the next 12 months was down from +2.7 points to -5.4 points;
  • Economic conditions over the next 5 years was down from +11.4 points to +5.4 points;
  • The measure of whether it was a good time to buy a major household item was down from +25.5 points to +23.4 points.
• The measure of inflation expectations rose from 3.8 per cent to 4.1 per cent.

Lending

• The Australian Bureau of Statistics reported: “In seasonally adjusted terms, lending commitments to households fell 2.4 per cent in January 2019. This was driven by falls in new lending both for investment dwellings (-4.1 per cent) and for owner occupier dwellings (-1.3 per cent).
• The fall in lending commitments to households follows a (revised) 3.6 per cent fall in December 2018.
• In seasonally adjusted terms, the value of new lending commitments for owner occupier dwellings is down 17.1 per cent from January 2018, and the value of new lending commitments for investment dwellings is down 28.6 per cent from January 2018.
• While there was also a fall in the number of loans to owner occupier first home buyers (-0.3 per cent) in January, this was more stable than the 3.2 per cent fall in the number of loans to owner occupier non-first home buyers.
• Lending to households for personal finance (up 1.2 per cent) was the only household lending category to record a rise in January, however new lending is down 16.0 per cent compared to January 2018, seasonally adjusted. The value of lending to households for refinancing fell 3.4 per cent.
• In trend terms, lending to businesses fell 1.3 per cent in January, but is up 2.5 per cent from January 2018.”
• The share of first home buyers (excluding refinancing) rose from 26.5 per cent to 26.6 per cent in January and below the 6-year high of 27.0 per cent in November.
• Excluding refinancing, the number of owner-occupier home loans across States & territories were: NSW (-4.9 per cent); Victoria (+0.4 per cent); Queensland (-2.4 per cent); South Australia -0.7 per cent); Western Australia (-0.7 per cent); Tasmania (+2.4 per cent); NT (+1.0 per cent); ACT (-7.5 per cent).
• Fixed-rate home loans accounted for 16.6 per cent of all owner-occupier loans in January, down from 16.9 per cent in December.

Credit card lending

• According to the Reserve Bank, the average credit card balance fell by $83.38 (or 2.6 per cent) to $3,181.18 in January – a similar decline to January 2018.
• Of credit cards attracting interest charges, the average outstanding balance rose by US$22.55 or 1.1 per cent in January to $1,995.78.
• The average credit card limit fell by $1.69 to $9,528.89.
• Usage of credit card limits stood at a 20-year low of 33.4 per cent in January.

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.
• The monthly National Australia Bank business survey is valuable in providing a timely reading about the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.
• Lending to Households and Businesses is released monthly by the Bureau of Statistics and contains figures on new housing, personal, commercial and lease finance commitments. The importance of the data lies in what it reveals about the appropriateness of interest rate settings, confidence and spending levels in the economy.
• The Reserve Bank releases data on credit and debit card transactions each month. The credit card figures are useful in highlighting consumer borrowing and spending trends.

What are the implications for interest rates and investors?

• Business conditions have eased to below long-term average levels, driven lower by reduced profitability. And political uncertainty and slowing economic growth have pushed business confidence to the lowest level in three years. With recent polls showing the potential for a hung parliament following the NSW election on March 23, it is unsurprising to see the state record the weakest business confidence across the country. A weakening housing market is also a factor, influencing business activity and consumer spending. Remarkably, this comes at a time when the NSW unemployment rate is at four decade lows.
• Consumer sentiment ebbs and flows and the last time we saw an outsized weekly fall (-6.0 per cent for the week ended October 21) following the Wentworth by-election, the ANZ-Roy Morgan index lifted by 6.5 per cent over the following three weeks.
• Aussie economic growth followed the global trend by weakening significantly in the second half of last year. GDP growth slowed to an annualised rate of near 1 per cent from a robust 3.8 per cent in the first half. With economic growth likely falling below population growth (note the latest population figures are only to June 30 – some six months behind GDP growth data) negative headlines surfaced about a “GDP per capita recession”.
• Commonwealth Bank Chief Economist Michael Blythe, however, has highlighted today, “what matters for living standards is not production per se. But the income generated by that production. It is Real Net National Disposable Income per capita that matters for those that want to keep a running tab on living standards. That measure grew by a respectable 2.1 per cent during 2018.”
• The ANZ-Roy Morgan consumer confidence survey was conducted during a data-heavy week where several ‘top shelf’ data releases (i.e. retail trade) disappointed, signalling a continuation of soft economic activity at the beginning of 2019. The Aussie dollar was down 0.8 per cent against the greenback.
• Aussies are increasing risk averse and appear to be increasingly de-leveraging their household balance sheets. Loans to purchase cars and the number of loans taken out to refinance homes are at 4-year lows. Credit card debt is falling. The size of home loans have peaked and desire to renovate using leverage is at record lows. Of course, the reduced availability and supply of credit is a significant factor, weighing even further on the property market.
• The concern with households ‘battening down the hatches’ is that reduced consumer spending will hamper broader economic activity. It appears that whoever wins government in May will need to unleash some fiscal initiatives, including a bring-forward of proposed tax cuts, to encourage consumers to spend.
• CommSec expects interest rates to be unchanged for the foreseeable future.