•The Westpac Melbourne Institute Index of Consumer Sentiment rose by 1.6% in September from 96.6 in August to 98.2 in September
This is the seventh consecutive month that the Index has been below 100. Apart from the 2008/09 period when the Index held below 100 for 16 consecutive months this represents the longest run of consecutive ‘sub 100’ prints since the early 1990s. Furthermore, there have only been two months in the last 15 when the Index has printed above 100.
The consumer is clearly stuck in an extended ‘cautiously pessimistic’ phase. In September last year the Index printed 96.9 so it has only increased by 1.3% over the whole year. That is despite 1.25% of rate cuts from the Reserve Bank; a more or less steady unemployment rate which is close to full employment; and some recent positive news around the threatening European situation.
This does not bode well for consumer spending and is consistent with the slowdown in consumer spending indicated by the June quarter national accounts. Although this followed a strong March quarter rise, the softening has come despite major policy boosts to household incomes including $1.9bn in fiscal handouts. With a sharp fall in July retail sales confirming this boost is now reversing, underlying momentum appears to be soft, in line with the consistently downbeat signal from the Consumer Sentiment Index.
Media coverage is often a major factor shaping respondents’ confidence including how they assess their own financial position and how they evaluate macro issues.
In the September report we receive an update on the news items which are capturing the attention of consumers and whether these were favourable or unfavourable. It shows the dominant news in September was around ‘economic conditions’ with 47% recalling news on this issue. Next was ‘budget and taxation’ (39.8% recall); international conditions (25.5% recall); and employment/wages (20.6% recall). Other topics registering lower recall include covered interest rates; inflation; politics and the Australian dollar.
Since June, the overall sentiment Index has increased by a modest 2.7%. Respondents generally recalled slightly less unfavourable news on international conditions although these items were still overwhelmingly negative. Other news was viewed as even more unfavourable than in June.
Four of the five components of the Index increased with the sub- indexes tracking views on “family finances compared to a year ago” up 0.3%; “family finances over the next 12 months” up 4.8%; “economic conditions over the next 12 months” up 0.6% and “economic conditions over the next 5 years” up 3.4%. The sub- index tracking views on “whether it is a good time to buy a major household item” fell by 0.4%.
By June this year we were particularly concerned by readings on “family finances over the next 12 months” which was printing at a level around the low-point of the 2008-09 period. Since thenwe have seen an encouraging improvement in this component which has increased by 11.4%. However it is still at a historically low level. For example the average print of that component during that 2008/09 period when the Index registered 16 consecutive months below 100 was 105.2 – today’s print of 96.2 is still well below that average. We can only conclude that respondents remain concerned about their finances despite the recent rally.
This survey also provides a quarterly update on respondents’ savings preferences. There was a sharp increase in the proportion of those respondents who assess bank deposits to be the wisest place for savings, with that proportion increasing from 32.6%
in June to 39.0% in September. That proportion is the highest proportion since December 1974 and comfortably exceeds the peak proportion during the 2008/09 period of 36.9%. For this survey the 6.4ppt increase in preference for bank deposits was at the expense of real estate which fell from 25.0% in June to 19.8% in September. The proportion of respondents favouring shares stayed near record lows at 5.5%, while the proportion opting for ‘pay down debt’ was steady at 20.4%.
If we compare the total proportion of respondents who prefer conservative savings options, covered by bank and other forms of deposits in conjunction with “pay down debt” the current proportion registers 63.5% of respondents. That compares with 64.2% in December 2008 when we were at the height of risk aversion during the Global Financial Crisis. In short, respondents are exhibiting a similar level of risk aversion in terms of their savings preferences as we saw in 2008.
The Reserve Bank Board next meets on October 2. Our forecast has been and remains that the Bank will decide to cut the official cash rate by 50bps over two meetings by year’s end. The case for lower rates is strong. Inflation remains well contained and the Bank’s own forecast has inflation remaining consistent with the target over the next one to two years. Interest rates are only slightly below neutral levels. The June quarter national accounts showed that consumer spending is slowing and investment in residential construction and plant and equipment has been contracting for the last few quarters. Despite a near 10% fall in the terms of trade the Australian dollar has failed to perform its usual ‘shock absorber’ role. Fiscal policy at both Federal and
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state levels is tightening. Both consumer and business confidence are soft. From a domestic perspective only the fall in the unemployment rate and the ongoing surge in mining investment counter the case for lower rates. However, the fall in the unemployment rate has been due to discouraged workers leaving the workforce while the medium term outlook for the mining investment has recently been revised down by some mining companies. In short, we think the case for lower rates has already been made and there must be a reasonable chance that the Bank will decide to move in October. However, central banks are conservative so a November ‘call’ for the first move looks to be more prudent. Bill Evans, Chief Economist
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