After yesterday’s ray of light in the NAB business survey, today we resume regular programming with another very average economic report. Following are some excerpts from the Westpac Consumer Confidence Survey for April with commentary (full report at the end).
Lacklustre Consumer Sentiment
The Westpac-Melbourne Institute Index of Consumer Sentiment rose 1.2% in April from104.1 in March to 105.3 in April.
Westpac’s Chief Economist, Bill Evans, commented, “This is a fairly predictable, yet lacklustre result. Over the month households have been exposed to both positive and negative influences.
On the positive side we have seen the Reserve Bank hold rates steady for the fifth consecutive month. The Australian dollar has reached the remarkable level of USD 1.05 buoying those Australians who do not work in exposed industries like tourism and retail. The internet has enhanced the importance of a high Australian dollar to households as more spending migrates towards purchasing goods offshore via online stores.
Job prospects and security remain strong. It was recently announced that employment increased by 37,800 jobs in March reducing the unemployment rate to 4.9%.
On the negative side we have seen the frightening events in Japan and ongoing turmoil in the Middle East and North Africa. This has seen the crude oil price rise by around 8% since the last survey and by 25% since the beginning of the year. Of more direct significance to households has been the 3% increase in local petrol prices since the last survey and the 13% increase since the beginning of the year. The strength in the Australian dollar and containment in the costs of refining has restrained petrol prices locally but expectations amongst households are likely to be for even higher prices as we move into the holiday period.
Details of the survey paint a bleaker picture for city dwellers. The Confidence Index for non metropolitan respondents surged by 12.2%. That was probably due to rising prices for soft commodities including beef, wheat, lamb and cotton and extensive rainfall in eastern Australia. In contrast the Confidence Index for metropolitan respondents fell by 4.6%. This most likely points to the greater importance in the cities of those factors we believe are weighing on households – high debt levels; fragile house prices; sharp increases in interest rates over the last year or so; and rising health; utility and education costs.
You said it, Jack. This is a weak bounce coming out of the floods. As I’ve argued before, disleveraging consumers are vulnerable to shocks. Back to the survey:
The Confidence Index for the metropolitan area is now below the index for the non metropolitan areas for the first time since August 2009.
In recent surveys we have been paying particular attention to how households assess their own financial situation. Two of the five components of the overall Index measure households’ assessments of their own financial position. The index tracking views on “finances relative to a year ago” rose by 0.1%; while the index tracking expectations on finances over the next 12 months increased by 1.4%. However both those components are below their levels of April 2009 despite the overall index being 13.5% above its level of two years ago. That is because “economic conditions over the next 12 months”, which increased by 3.4% in the April survey is well above its level of two years ago although ” economic conditions over the next 5 years” fell by 3.3% in April, to also be slightly below the read in April 2009. The index tracking views on “whether it’s a good time to buy major household items” rose by 3.5% in April to be 29% above its level in April 2009. However, we expect that respondents feel constrained by their downbeat assessment of their own financial position in purchasing despite attractive discounts partly due to the strong Australian dollar.
Let’s hope Mr Evans is right. In his recent speech on why the consumer is struggling, RBA Assistant Governor Phil Lowe singled this measure out as a swing factor in growth (and by extrension, rates):
In consumer surveys, the number of people that say now is a good time to buy major household items is around its highest level in more than two decades (Graph 3). But interestingly, households do not appear to have responded particularly strongly to this fall in both the absolute and the relative price of manufactured goods, with retail spending having been quite subdued recently. Many households have preferred to use the growth in their incomes to increase their savings rather than to buy more manufactured goods at lower prices. As the Bank has discussed on a number of occasions recently, whether or not this continues will have a significant bearing on how the economy evolves over the next year or so.
Of course, I’m not really concerned about it actually happening and Westpac has had the courage to actually outline why:
We were surprised to see a 5.1% fall in respondents’ assessments of whether now is a good time buy a dwelling. This response is usually driven by movements in interest rates with the measure back at its lowest level since November last year when sentiment was knocked by a combined official rate hike and moves by the major banks that saw average mortgage rates increase 40bps. Concerns over finances and reports of weak auction clearance rates and soft prices are clearly affecting confidence in housing despite steady interest rates.
I don’t agree with interepretation and regular readers will not find the results a surprise at all. It’s damn obvious why people don’t think it’s a great time to buy a house: high debt, volatile world hostile to debt, absurd valuations, hawkish RBA, can’t afford it etc, etc, etc. Which is why, presumably, so many have drawn the same conclusion. The survey concludes:
The Reserve Bank Board next meets on May 3. There is little chance of any change in rates at that meeting despite an inflation report which will be released on April 27. We expect the Reserve Bank’s measure of quarterly underlying inflation to rise from 0.4%qtr, registered last January, to 0.7%qtr in April. That will be consistent with the Bank’s current forecast of around 2.75%yr for 2011. Of much more importance will be wages and employment. The mining boom and the surge in the terms of trade have given a huge boost to national incomes and the risk is that this boost shows up in rising wages and employment despite a likely increase in the profit share. With the unemployment rate already below the Bank’s assessment of full employment and the lead indicators pointing to ongoing strength in jobs growth the Bank will be most sensitive to labour market pressures. We continue to give a reasonable chance to another rate hike in the September quarter but expect, given the ongoing evidence of a concerned consumer and sluggish housing market, a follow up move will not be necessary until well into 2011”, Mr Evans said.
After the rise in yesterday’s producer and labour components in the NAB survey that is indeed possible. Home owners should begin praying that the labour market doesn’t tighten any further in the next few months.
What extraordinary times. The country getting richer by the second, whilst its inhabitants feel poorer by the second.
