Westpac Red Book shows consumer green shoots

Advertisement
ScreenHunter_40 Sep. 15 18.40

By Leith van Onselen

Late Friday, Westpac released its quarterly consumer Red Book, which provides an in-depth assessment of the current state of the Australian consumer.

This quarter’s release, which captures the mood in the week prior to the Federal election, shows a consumer that is growing more confident and becoming decreasingly risk averse, but still concerned about job security.

From the Executive Summary:

Advertisement

The September Westpac–Melbourne Institute Consumer Sentiment survey was conducted in the week leading into the Federal election and the results have been heavily influenced by expectations around a change of Government.

In moves reminiscent of those seen when the Howard government was first elected in 1996, the headline Westpac–Melbourne Institute Consumer Sentiment Index surged into solidly optimistic territory, led by rising expectations for the economy with the effects of the political shift apparent through most of the survey detail.

The key question is whether the election acts as a short-lived ‘shot in the arm’ or as a catalyst for a sustained rally. In 1996 the election boost to sentiment had largely dissipated three months later.

There are some hints of a more enduring change this time around. In particular, the ‘wisest place for savings’ question, which is run every three months and arguably less ‘tainted’ by election effects, has shown a notable shift with fewer nominating ‘safe’ options (‘bank deposits’, ‘repay debt’) and a clear warming towards real estate.

The implied attitude towards risk is summarised in the Westpac Consumer Risk Aversion Index which declined sharply between Jun and Sep.

That could prove to be a game changer – the Index has, at times, been a good predictor of the household savings rate, particularly when it was rising sharply in 2001-09. It’s performance during other periods has been much less reliable though, particularly when the savings rate has been in decline. Needless to say we will be monitoring the spending and credit data closely to see if a shift is occurring.

However, there are also parts of the survey that remain of great concern. In particular, the Westpac–Melbourne Institute Unemployment Expectations Index, which has been much more pessimistic than sentiment throughout the last two years, posted a less convincing improvement in Sep and is still at a deeply pessimistic level.

Unemployment concerns will clearly still be a factor weighing on consumer demand and restraining the housing upturn. A sustained easing in risk aversion would be good but a big fall in job loss fears would be even better.

Below are some key charts that tell the story.

First, overall consumer spending remains weak when viewed in a historical context (see next chart).

ScreenHunter_41 Sep. 15 18.44

But consumer sentiment is up strongly, courtesy of the anticipated change of government (see next chart).

Advertisement
ScreenHunter_42 Sep. 15 18.46

Consumers are also becoming more bullish on housing. The sub-index tracking views on ‘time to buy a dwelling’ jumped 6.5% to 145.0, its highest level since Aug 2009. However, job insecurity appears to be restraining the pick-up (see below charts).

ScreenHunter_44 Sep. 15 18.50
Advertisement

Consumers are displaying a marked easing in risk aversion. The biggest move was away from bank deposits (–4.6ppts) and ‘pay down debt’ (–2ppts) and towards real estate (+2.9ppts) to a lesser extent shares (up 0.4ppts). The net effect produced a big 12.9pt decline in the Westpac Consumer Risk Aversion Index from +29 in Jun to +16.1
in Sep. That follows a 12.9pt decline over the previous three quarters (see below charts).

ScreenHunter_45 Sep. 15 18.52

And while unemployment levels fell significantly in September, suggesting fewer consumers expect unemployment to rise over the year ahead, the index is still at a highly elevated (i.e. fearful) level (see next chart).

Advertisement
ScreenHunter_46 Sep. 15 18.56

Full chart pack below.

Westpac Red Book (September 2013)

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.