Westpac: Aussie consumer buckling

Via Westpac’s superb Red Book:

― Our CSI± composite combines subindexes tracking views on ‘family fi nances’ and ‘time to buy a major item’ with the Westpac Consumer Risk Aversion Index and provides a good guide to spending with a lead of about 6mths. ― CSI± fell 2.4% from 90.7 in Oct to 88.5 in Jan, the lowest read since Sep 2017. The index remains a long way below its long run average (–14pts) and is pointing to per capita spending falling about 1%yr. With population growth at 1.6%yr that implies aggregate spending growth of just 0.5%yr, well below the current 2.5%yr. Note that the index has been a less reliable guide to spending in recent years.

― The Q3 national accounts provided another weak update on the consumer, spending undershooting expectations, real disposable income essentially fl at and a further decline in new savings pointing to vulnerability going forward.

― Consumer spending rose just 0.3%, annual growth slowing to 2.5% and the 6mth annualised pace dipping to 2.3%. Spending continues to track a choppy quarterly path, making it difficult to tell how much of the Q3 weakness is a sustained shift. The biggest downside surprises were around services and fuel, some of the latter likely to reverse following more recent declines in petrol prices.

― Weak incomes meant the rise in spending was again partially ‘funded’ by lower savings – the savings rate falling from an upwardly revised 2.8% in Q2 to 2.4% in Q3, a post GFC low. This highlights clear vulnerabilities going forward given risks around potential wealth eff ects (see p16).

― Most partials suggest weakness has carried into Q4. Retail sales rose 0.3% in Oct and 0.4% in Nov but CPI data suggests much of this was due to higher prices rather than volumes. Anecdotes suggest Christmas sales were weak with consumer sector responses to the NAB business surveys also showing a sharp weakening late in the year. However the AiG PSI was more ‘mixed’ than weak’.

― Overall, developments over the last 3mths have prompted us to mark down our 2019 and 2020 forecasts for growth in consumer spending – from 2.8%yr to 2.4%yr. Downside risks continue to dominate.

― Australian household balance sheets are seeing significant shifts that are likely to restrain demand in coming years and are a key risk to the domestic outlook. In particular, a prospective ‘wealth effect’ drag on demand stemming from the decline in house prices is a major area of uncertainty.

― The flow-on impact on spending and saving is also uncertain with evidence from previous cycles mixed; few precedents in which price declines have occurred without wider macroeconomic or interest rate cycles; and little evidence of a major positive effect during the upturn.

― On this last point, one aspect that we have highlighted is the diff erence in balance sheets and savings trends by state. With the current price cycle heavily concentrated in Sydney and Melbourne, any wealth eff ects should only show through in NSW and Vic.

― State data shows gross savings rates have declined by about 1.7ppts in these states over the last year. That conditions our base case view that this apparent positive wealth effect will reverse over the next 2yrs. Given no change in other states, this would see the savings rate nationally rise 1ppt by Dec 2020, constraining spending growth to 2.4%yr.

― The chart and table below show the base case trajectory for the savings rate and the corresponding outlook for consumption growth and present several alternative scenarios including: ‘no change’ (akin to the RBA’s view of essentially no wealth eff ect); a more pronounced rise in the savings rate of 2ppts; and a sharp rise scenario of +3ppts.

― Consumption projections are all on the basis of no other changes to household incomes or payments (e.g. stemming from interest rate changes). They range from a high of 2.9%yr on the ‘no change’ scenario to 1.8%yr and 1.3%yr on the higher savings rate scenarios.

Given house prices are only halfway down on most measures, I suggest taking the over on saving and the under on spending.

If consumption comes in at 1.3% then along with falling dwelling construction, topping infrastructure and tapering business investment domestic demand will come around the same:

Unemployment will be rising at a good clip risking a disastrous feedback loop into house prices.

Rate cuts are coming and there is a building asymmetric risk in waiting for them. The more the delay the less impact that they will have as deflation expectations embed with a souring economy.