MB often works with international hedge funds on the Aussie economy. I recall the reaction of one from the US when he discovered that, unlike US fixed rate mortgages, Australian mortgages are all floating rate. He declared immediately:
“Households must all pray for the next recession!”
Why? Because that meant cheaper repayments for the overwhelming majority, rising disposable income and an increase in living standards.
Westpac’s exceptional Red Book this month is a study into what happens when that RBA insurance policy is terminated by the zero bound for interest rates.
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This is a very important lesson for fiscal authorities seeking to reboot household borrowing and house prices by holding back fiscal spending and forcing the cash rate as low as it can possibly go.
They have just come up against the structural hard limit in Aussie household leverage. The reassurance provided by a fiscal surplus is dwarfed by the ripping away of the RBA insurance policy, leaving households no choice but to bunker.
This will mean that although house prices rise for a time, the economic follow through will be much more muted than previous cycles, leaving the entire model struggling for breath and vulnerable to swift reversal.
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― The Westpac–Melbourne Institute Consumer Sentiment Index fell 5.5% to 92.8 in Oct from 98.2 in Sep, marking the lowest read since Jul 2015.
― The fall comes despite a further 25bp cash rate cut from the RBA in Oct – the third since Jun taking the cash rate to a new historic low of 0.75%. The Index has fallen 8.4% since the easing cycle began.
― Concerns about what the very low level of rates is saying about the economy appear to be outweighing any rate cut sentiment boost. Some of the deterioration in sentiment likely also reflects global developments and domestic issues including: slow growth; a diminished pass through from the RBA cuts to key lending rates; the absence of more substantive fiscal stimulus; and persistent weakness in wages growth.
― All components have recorded material declines since mid-2019 but the biggest falls have been around expectations for family finances and the economy. The sub-group detail underscores the widespread nature of the deterioration since Jun with 95% of the sub-groups we monitor recording declines.
― Risk aversion has continued to ease slightly but remains at elevated levels. The Westpac Risk Aversion Index has edged down from a peak of 51 in Dec to 43 in Sep but is still well above the long run average of 14.7.
― CSI± our modified sentiment indicator that we favour as a guide to actual consumer spending, has seen a slightly milder decline but is very weak nonetheless, 16pts below its long run average and at an 8yr low consistent with outright falls in per capita consumer spending. While we continue to expect some uplift from recent policy measures, the signs from sentiment so far are not promising.
― Consumer attitudes towards major purchases have also seen a milder weakening, the ‘time to buy a major item’ index down only 4.4%yr and, at 114.5, still at a reasonably positive level overall. Spending on durables has been much weaker, with the biggest annual decline since the GFC. The combination suggests other factors such as budget pressures, tighter access to finance and risk aversion are over-riding sentiment when it comes to purchase decisions.
― Just over 16% of consumers reported receiving a payment, 69% reported no payment and 15% responded “don’t know”. The mix suggests a little over half of those eligible for a meaningful off set payment had received one by early Sep. However, the low raw fi gure – just 16% of consumers – is a reminder of how limited the scope of the measure is and, in turn, why off set payments seem to be generating little traction with wider consumer sentiment. Amongst those that had received a payment, 29% planned to spend it all, and a further 16% planned to spend over half. The remainder (53%) planned to spend less than half including around 25% who planned to save the full payment. The results point to about half of the tax off set payments being spent – slightly higher in NSW and WA and amongst the middle income group that is set to receive the bulk of the payments. That is towards the lower end of the range we considered in our initial impact assessment back in July. All up, the eff ect of the income boost appears to be a little smaller and may be coming through a little more slowly and diffusely than anticipated.
― The ‘time to buy a dwelling’ index has had a mixed few months, initially extending on its strong annual gain in Aug before posting a notable pull back in Sep-Oct. At 116.6, the Oct read is down 5.3% on Jul and a touch below the long run average of 119.7 but still up strongly on a year ago (+13.7%) and its mid-2017 low (+30%). The detail suggests affordability concerns may be creeping back into the frame in Sydney and Melbourne.
― The Westpac-Melbourne Institute Consumer House Price Expectations Index has continued to surge over the last 3mths, rising a further 16.6% to be up a spectacular 54.4% since May. At 138, the Index is at its highest level since May last year and well above the long run avg of 126.
― Despite the wider loss of confidence, consumer labour market expectations have seen little change. The WestpacMelbourne Institute Unemployment Expectations Index declined 1.9% over the three months to Oct, holding slightly above its long run average (recall that lower readings indicate that more consumers expect unemployment to fall in the year ahead). Even with a more stable few months, the index nationally has still deteriorated by 9% since the middle of the year, consistent with cooling labour market conditions.
It is the MB view that the consumer needs not just more fiscal spending, but an entirely new economic narrative that gives her hope that living standards can rise in the future via some mechanism other than falling interest rates which can go no further.
Josh Recessionberg has no idea what he is dealing with.
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.
― Risk aversion has continued to ease slightly but remains at elevated levels. The Westpac Risk Aversion Index has edged down from a peak of 51 in Dec to 43 in Sep but is still well above the long run average of 14.7.
