• The Westpac–Melbourne Institute Index of Consumer Sentiment fell by 8.3% in July from 101.2 in June to 92.8 in July.
This is a surprisingly weak result. This is the lowest level for the Index since May 2009. During the February 2008 to May 2009 period the Index averaged 88.This was caused firstly by aggressive interest rate hikes from the Reserve Bank followed by the worst period of the global financial crisis. The only other time in recent history when the Index has been sustained around the current level was during the period following the GST introduction which also coincided with the bursting of the ‘dot com’ bubble. We then have to go back to the deep recession of the early 1990’s for the next period of comparable weakness in the Index.
Let’s get over this silliness about falling sentiment being a “surprise”. Economic data in the services economy has been trumpeting weakness all year, asset prices are falling, the RBA remains hawkish and the world is very unstable. Australians are only human.
It appears that a combination of concerns over the European financial crisis; the ongoing impact of the seven interest rate hikes between October 2009 and November 2010; and uncertainty about the introduction of a price on carbon; are now really undermining the confidence of consumers. This is despite a very low unemployment rate of 4.9%. However, recall that in the June Sentiment Report there was a very sharp deterioration in respondents’ assessments of the employment outlook. The employment outlook for the July Report will be released tomorrow.
Not only is the level of the Index disturbingly low but the sheer magnitude of the fall is also remarkable. We have seen 11 falls of this magnitude since the early 1990s recession but only two of them have been from a lower starting point (once again these occurred during that 2008 – 2009 period). Furthermore, such large falls have typically been associated with a major event such as an interest rate increase; a spike in petrol prices; the collapse of Lehmans; or recession fears.
And which of these do we not have right now?
It must be stressed that this survey closed the day before the government’s announcement on the details of the decision to price carbon and provide an associated compensation package. There were some interesting aspects to the details of the survey. Firstly, by far the largest fall in confidence (–11.1%), was in the highest income group. Of course, the government’s compensation package associated with the introduction of a price on carbon is least generous for those in the upper income brackets. Secondly, the confidence of those folks who have a mortgage plummeted by 16.5%. Despite the Reserve Bank keeping rates on hold following the Board meeting in July (until the last governor’s statement) the Bank has persisted with its strongly hawkish rhetoric.
This is continuing to undermine confidence amongst households who it would appear are incredulous that such a policy is favoured given the current circumstances. All components of the Index fell in July. The index tracking views on the outlook for economic conditions over the next 12 months fell by 13.5% while the index tracking the 5 year outlook was down by 10.2%. The index tracking views on ‘whether now is a good time to buy a major household item’ was down by 9.5%. Until this report these measures had been significantly higher than during the 2008/09 period. Households’ assessments of their own financial position had been nearing the lows of the 2008/09 period.
Indexes also fell with the indexes tracking ‘finances compared to a year ago’ down by 2% and ‘finances over the next 12 months’ down by 4%. A most disturbing aspect of this report is that households’ assessments of the outlook for their own finances is now lower than in every single month (except July 2008) during that 2008/09 period and, apart from in the month directly before the introduction of the GST, the lowest since the recession of the early 1990’s.
There was one positive aspect to the survey. Confidence in housing picked up by 3.3% with the Index now at its highest level since January 2010.That may be the result of modest recent falls in house prices improving affordability. A special question associated with this survey showed that a majority of respondents still expect house prices to rise rather than fall although that majority has shrunk noticeably since we last asked the question back in April.
Recognition that houses have become a little more affordable might improve sentiment but concerns that prices may fall further are likely to continue to restrain households’ buying intentions.
Let’s not get overexcited here. I’m not sure how falling house prices increases confidence. Perhaps the stabilisation in some credit aggregates has helped. But only last month, the same question drew a terrible result. And in the broader context of this report, it looks more like an outlier.
The Reserve Bank Board next meets on August 2. On July 27 the Inflation Report for the June quarter will print. It was the release of the much higher than expected inflation read for the March quarter on April 27 which motivated the Bank to move from a neutral bias to the strong tightening bias that was announced in its Statement on Monetary Policy on May 6. In our experience the language associated with that bias indicated an imminent move.
Of course that has not happened and as global financial markets continue to deteriorate and, as demonstrated in this Report, household nervousness intensifies the Bank is very likely to move back to its neutral bias. We do not expect that the Inflation Reports for the remainder of the year will change that stance. Markets are now pricing in a likely 25 bp rate cut in the near future. We saw in 2008 that despite three consecutive reads of 1.2,1.2 and 1.1 for quarterly underlying inflation the Bank still flipped from a tightening bias in May to a 25 bp rate cut in September followed by 100 bp’s in October. As discussed above the confidence of the household sector is now comparable with that period. However global financial conditions, despite uncertainty in Europe, are unlikely to deteriorate to the extent we saw in 2008. Nevertheless these conditions will hardly be conducive to the Reserve Bank raising rates. As such we do not expect to see a change in rates for the remainder of this year, with an easing bias the most appropriate policy response to the current economic circumstances.
Jeez, Bill, that’s a hell of backflip from the bullhawkian bluster of May.
