Red Book sees housing top, Budget carnage

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Westpac’s Red Book for May is out. It is the bible of Australian consumer attitudes and this month is filled with red ink. Here is the executive summary:

― The Westpac–Melbourne Institute Index of Consumer Sentiment fell 6.8% in May from 99.7 to 92.9 driven by a sharply negative response to the Federal Budget.

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― Sentiment in May was at its lowest level since Aug 2011 and below the levels prevailing prior to the RBA’s interest rate easing cycle.

― The sentiment reaction to this year’s Budget is similar to the 7% decline seen post-Budget last year and comparable to other post-Budget falls. Although it is difficult to generalise, some of these previous declines were followed by partial recoveries the following month.

― The Budget impact was clear in the component detail with a very sharp decline in the sub- index tracking expectations for ‘family fi nances over the next 12mths’. Notably, the sub-index tracking expectations for ‘economic conditions, next 5yrs’ rose, suggesting the Budget was viewed as a positive for medium term economic prospects.

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― Additional survey questions on the expected impact of the Budget on family finances shows 59% anticipate a negative impact over the next 12mths, a significantly higher reading than the 46% reading last year.

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― Our CSI± measure, our modified sentiment indicator that we favour as a guide to actual spending, also fell heavily, declining 7.5% to its lowest level since Sep 2012. That points to a likely slowing in spending growth over the course of 2014 although how pronounced this proves to be depends on whether we see sentiment recover from this month’s Budget hit in coming months.

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― Retail sales, other partial data on consumer spending and private business surveys all suggest demand has lost momentum in recent months. However, the timing of Easter and ANZAC day public holidays in 2014 may be resulting in abnormally weak reads for Apr sales in some segments.

― The sub-index on ‘time to buy a major item’ rose 3.2%, arresting what had become a disconcerting slide over the previous 5mths and drawing it back in line with its long run average. The gain also points to fi rmer buyer demand for vehicles.

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― The index tracking views on ‘time to buy a dwelling’ continued to deteriorate in May with a 6% fall taking it well below its long run average. The Westpac Melbourne Institute House Price Expectations Index also fell 9.8% in May to its lowest reading since Jan 2013, although the Index remains at a robust level.

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― Housing markets are also showing signs of a cooling off which, given the lag between sentiment and activity, may become more pronounced in the second half of 2014. Notably, the weakening in housing sentiment is occurring without a rise in interest rates.

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― The Westpac Melbourne Institute Unemployment Expectations Index improved slightly in May, a promising result given the weakness in headline sentiment. Expectations remain very weak overall though with recent gains only reversing about a quarter of the sharp deterioration between Sep and Mar.

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Given the backdrop of the looming capex cliff and presumption by the RBA that housing and consumption will carry the economy over the gulf, this is a very unhappy picture. I expect some recovery from the “sticker shock”. But at times like these the percentage play is to take things at face value. The combined epochal change of this Budget (it’s end of an era feel) plus the imbalances that the government has built into it mean the damage to confidence, spending and housing will likely be material.

Expect a second half rate cut with the risks tilted towards earlier than my current October forecast.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.