― The Westpac–Melbourne Institute Consumer Sentiment Index has improved again over the last 3mths, rising 3.6% since Apr to a Jul read that is the most positive since Nov 2013. At 106.1 the Index is 8% above its 2014-17 avg but still not strong by pre-GFC standards.
― Forward-looking components have driven the latest gains, with a clear boost from the Budget and associated tax cut measures. A more balanced growth profile across states has also contributed to the improvement over the last year.
― The two ‘economic outlook’ sub-indexes are now well above their long run averages. The two ‘finances’ sub-indexes remain slightly below average.
― Risk aversion remains elevated. The Westpac Risk Aversion Index lifted from 40.5 in Mar to 44.4 in Jun leaving it unchanged on a year ago. More consumers continue to favour ‘pay down debt’ (22%) than real estate and shares combined.
― CSI±, our modified sentiment indicator that we favour as a guide to actual consumer spending, has shown a more muted lift since Apr, rising just 1.8% to 94.0, a level still well below average. Current levels point to lacklustre demand heading into the second half of the year although spending outperformed the indicator over the last year.
― The ‘time to buy a major item’ sub-index has also posted a more muted 2.9% gain since Apr. Actual spending on durables has lifted, driven by strong gains in ‘small ticket’ durables and a rebound in housing-related spend, more than offsetting weaker vehicle purchases.
― Consumer views around housing have deteriorated, price expectations in particular. The ‘time to buy a dwelling’ index has slipped 0.9% since Apr. At 103.1, the national index is well above its 2017 avg of 95.7 but still weak compared to the long run avg of 127.
― The Westpac-Melbourne Institute Consumer House Price Expectations Index has fallen 13.6% since Apr hitting 112.5 in Jul, a new low since early 2016 and well below the long run avg of 127.5. Over half of all consumers now expect prices to be unchanged or lower over the next year. The latest slide has been particularly sharp in NSW (–21%) and Vic (–17%).
― With the previously strong Sydney and Melbourne housing markets swinging into corrections, a key area of interest is the extent to which this may have spillover effects on wider activity. In particular, so-called ‘wealth effects’ of asset price moves on consumer demand present a key downside risk to the outlook. In this special topic we look at house price cycles, consumer activity and variations in sentiment components at a state level to try and tease out some of these effects.
― While wealth effects hold intuitive appeal, isolating and quantifying their specific impact is difficult with few examples of price swings occurring without other major macro factors also at play.
― The ‘signature’ of a wealth effect boost is a rise in net worth accompanied by a fall in the savings rate, the latter implying that spending is being induced to grow faster than incomes (and vice versa for a wealth effect drag). One complicating factor with this proxy is that savings also fluctuate in response to variations in income – reflecting both ‘consumption smoothing’ and residual savings behaviour. The table below summarises all booms and corrections classified by the extent to which savings and income shifts point to wealth effects.
― Consumer views on unemployment continue to show a softer tone. The Westpac-Melbourne Institute Unemployment Expectations Index has drifted sideways since Apr after a promising 10% decline over the previous 12mths (indicating an improved outlook for unemployment). The persistently softer tone from the index vs actual outcomes may reflect some of the additional pressures weighing on weak wages growth and labour incomes, i.e. the ‘quality’ of jobs on offer.
Judging by that the consumer is still not too freaked out by house prices falls which, ironically, means that they will keep falling.
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.
