Oil leaves consumer cold

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Fresh from Bill Evans at Westpac:

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The Westpac Melbourne Institute Index of Consumer Sentiment increased by 2.4% in January from 91.1 in December to 93.2 in January.

It is encouraging to at least see an increase in the Index. To be sure, the increase is not just reflecting a regular ‘holiday boost’ to sentiment that can be expected at this time of the year. The Index is seasonally adjusted so the rise indicates that sentiment has lifted over and above the rise normally seen in January.

However, when assessed in the context of the sharp 5.7% fall in the Index in December it is not a particularly strong result.

The Index is still down by 9.7% on a year ago and really only back at the levels we saw in the immediate aftermath of the Federal Budget when the Index had tumbled by 6.8%. At 93.2 the Index level indicates pessimists still outnumber optimists by a
significant majority.

Three key factors stand out as the likely reasons behind this modest increase.

Firstly, we have seen throughout most of 2014 that respondents were particularly unnerved by the reports of discussions around Budget issues. The recent hiatus in media coverage on Budget issues would have been a welcome respite for respondents. Even the $11bn further deterioration in the fiscal position announced in the Mid-Year Economic and Fiscal Outlook (MYEFO) would have had limited impact on consumers given that it was reported at the beginning of the holiday season and at a time when the Sydney siege was dominating news coverage.

The December labour force report would also have clearly boosted confidence. The unemployment rate was reported to have fallen from 6.2% in November (revised down from a previously reported 6.3%) to 6.1% in December with an impressive 37,500 jobs added on top of the 44,900 jobs added in November.

A sharp fall in petrol prices would also have been a positive. Local pump prices averaged just $1.10/litre nationally during the January survey week – a six year low and down sharply on the $1.32/litre recorded in December and the $1.46/litre average throughout 2014.

Having said that, movements in the components of the index were disappointing. Note that all components are also seasonally adjusted. The sub-index tracking views on ‘family finances versus a year ago’ fell by 3.9% to be down 8.5% over the year, while that tracking “family finances over the next 12 months’ rose by a modest 1.2% to be down by 4.5% over the year.

Despite the sharp falls in the ‘economic outlook’ components in December there was essentially no bounce-back in January. The sub-index tracking expectations for ‘economic conditions over the next 12 months’ fell by 0.7%, and the sub-index on ‘economic conditions over the next 5 years’ fell by 1.6%.

The modest increase in the overall index can be attributed to a 13.6% jump in the sub-index tracking views on ‘time to buy a major household item’. That increase merely restored that component to its November level fully offsetting the sharp fall we saw in December.

Consistent with the strong December labour force report we saw a promising 5.5% fall in the Westpac Melbourne Institute Unemployment Expectations Index – recall that higher readings on this Index indicate more consumers expect unemployment to rise in the year ahead, and vice versa. This index was stubbornly high throughout 2014 and even with January’s promising improvement it is still only 1.1% below the level of a year ago. The Index level still indicates a very pessimistic outlook for unemployment.

The news on housing improved. The index tracing assessments of ‘time to buy a dwelling’ increased by 9.4% following the 10.8% fall in the index in December .The index is still 11.4% below its one year ago level. This reversal of the December result removes some downside risk to the outlook for housing demand but does not change the more general picture of cooling sentiment towards housing.

We also saw a strong rebound in house price expectations. The Westpac Melbourne Institute House Price Expectations index increased by 8.6% following an 8.3% fall in December. Consistent with the signal from the “time to buy” index, this index is also indicating that confidence toward housing has cooled. This index is still down by 13.9% compared to a year ago.

The Reserve Bank Board next meets on February 3. Markets are giving little chance to the prospects of a rate cut at that meeting.

On December 4 last year Westpac forecast that the Bank would cut rates by 25bps in both February and March. At that time markets were pricing in the prospect of one rate cut by end 2015.

They are now expecting close to two cuts by end 2015, in line with Westpac’s view but at a much slower pace.

That’s a dud report given the oil collapse. Housing outlook improvements are no doubt linked to the capitulation to further rate cuts by major economists late last year following Sep QTR GDP. The RBA will be recalcitrant I suspect but will have no choice in the end.

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.