Eternal hope for a consumer rebound

Two diametrically opposite views have been expressed on the prospect for consumer spending in the past two days. Yesterday the Kouk persisted with his hyper-bullishness:

Most of the preconditions are in place for a strong bounce in consumer demand. Consumer spending is shaping up to be particularly strong in 2014, which is a vital element of the rebalancing of the economy as the mining investment boom fades.

In recent years, consumers have been hoarding their cash and are saving about 10 per cent of their after tax income. The last time household savings were this high was in the 1980s. Consumers are responding to the great global economic and financial market uncertainty, grateful Australia didn’t fall into recession and learning from what was a crazy period between 2002 and 2006 – where savings were zero or even slightly negative.

While this lift in savings is desirable in one sense, as it puts the household balance sheet and thus the sustainability of economic growth on a more stable footing, it has meant that the rate of growth in household consumption has been below trend.

If the recent lift in consumer sentiment translates through to a behavioral change that sees even a small fall in the saving rate and those savings are directed towards spending, the impact on consumption growth will be significant.

A factor that might prompt this scaling back in the pace of saving and in itself, might spark a spending lift, is the surge in wealth from the rise in asset prices, particularly in housing and stocks.

From the RBA yesterday, this is what the Kouk is pointing to:

Net worth is climbing on asset price appreciation and, so goes the argument, the wealth effect will lick in. Today, David Bassanese chimes in, reiterating his bear case:

While the bounce in both business and consumer confidence on the eve of the federal election is a hopeful sign for the economy, I suspect it says more about the unpopularity of the former federal Labor government than its does about the economic outlook.

The National Australia Bank’s survey of business confidence surged to a reading of plus 5.7 in August, from negative 3.4 in July. Not to be outdone, the Westpac/Melbourne Institute measure of consumer sentiment rose 4.7 per cent this month after a solid 3.5 per cent gain in August.

Whether this bounce in both business and consumer confidence lasts remains to be seen, but I’m not counting on a confidence-led sustained economic rebound any time soon. Instead, I suspect the challenges still facing the non-mining sectors of the economy will soon weigh on confidence again and keep consumer and business spending fairly subdued.

The recent bounce in confidence seems largely driven by temporary political factors, rather than a more enduring change in underlying economic conditions. According to NAB chief economist Alan Oster, the rise in business confidence was too large and broad-based to be explained by the early August cut in official interest rates alone. Instead, Oster reckons, “it is likely that expectations of political change and a decisive [election] result were very important.”

Far be it for me to agree with the Kouk on anything, but the surveys do suggest more to the current move in consumer confidence than just the election. All of this year, measures of consumer prudence have waned. Again from the RBA:

And data from APRA on household deposits has also trended down since the rate cutting cycle began, especially this year:

The data runs up until July when there was a sudden bounce, which may be seasonal (tax returns etc) or may be the result of unrest in markets, which would suggest brittle confidence.

Also, the recent run up in the Roy Morgan consumer data is revealing given it has been driven by improvements to personal finances not the economy:

Australians are far more confident about their personal finances compared to this time last year with 34% (up 5%) saying they are ‘better off’ financially than this time last year and 23% (down 3%) saying they are ‘worse off’ financially (the lowest since December 2007).

Also a rising majority of Australians (55%, up 2%) say now is a ‘good time to buy’ major household items while just 15% (down 1%) of Australians say now is a ‘bad time to buy’.

Now 38% (unchanged) of Australians expect ‘good times’ economically over the next twelve months compared to 24% (up 1%) that expect ‘bad times’ for the Australian economy.

In addition 41% (unchanged) of Australians expect the Australian economy to have ‘good times’ over the next five years compared to 17% (up 1%) that expect ‘bad times’ for the Australian economy.

There is also a developing divergence between Westpac’s household barometer and retail spending:

My view is that rising house and stock market prices are also eroding consumer prudence and we could see a decent rebound in retail over Christmas and especially the New Year.

But beyond that I agree with Bassanese. It will be a false dawn. The shift in consumption is structural on two fronts. The persistent savings rate is one. The other is that more income is going to persistently inflationary essentials like utilities and education than before.

Add the severe and prolonged capex cliff, rising unemployment, subdued income growth, disillusion with the Abbott government (which got in by default), no more rate cuts and either slowing house price growth or increasingly restive commentary around a bubble. Add it all up and its very probable that retail will struggle and there won’t be any substantial contribution to growth from the consumer next year.