Bulletin

15 August 2012

Consumer Sentiment fails to get any traction

The WestpacMelbourne Institute Index of Consumer
Sentiment fell by 2.5% in August from 99.1 in July to 96.6 in August. This is a disappointing result. There has been enough positive news around since the last survey, and generally over the last few months, to have sustained an upswing in Consumer Sentiment. News that retail spending was boosted in the first half of the year; unemployment remains low; the Government has released $1.9bn in fiscal compensation over the MayJune period; the Reserve Bank had cut the overnight cash rate by 0.75% in May/ June; and the President of the European Central Bank has been promising to do whatever it takes to save the Euro has been unsuccessful in sustaining an upswing in sentiment. Indicative of a more positive global outlook the share market has risen by 2.9% and the Australian dollar has risen from around USD 1.02 to USD 1.05 since the survey in July, the latter also reflecting Australias attractive interest rate differential. Rather, the Index seems to be settling in a cautiously pessimistic range. This is the sixth consecutive month that the Index has registered below 100, averaging 96.2. This is unusual. The only comparable periods since the recession of the early 1990s are in 200001 when the Index printed an average of 96.5 over an eight month period and in 200809 when it averaged 88.0 over a 16 month period. That most recent period coincided with the authorities responding with a very aggressive fiscal expansion. In the current period both Federal and state governments are entering into substantial fiscal consolidations. While the Reserve Bank did not surprise by holding rates steady at its August Board meeting, consumer perceptions of the outlook for interest rates have shifted. Media reports that the Reserve Bank may have decided against future rate cuts are likely to have unnerved households. For example, despite rates staying on hold the confidence of respondents who hold a mortgage fell by 3.9%. The print for August indicates that pessimists clearly outnumber optimists. The Index is only 0.6% above the level in March this year which preceded the most recent rate cuts and the cash disbursements. The failure of the Index to maintain any upswing raises the risk that the strong retail spending which we have seen in the first half of the year might be largely due to aggressive discounting and the one-off boosts to income growth from the fiscal payments and rate cuts. The risk, as indicated by this ongoing under-performance of Confidence, is that retail spending might lose momentum in the second half of the year. Confidence fell in every state except for Victoria with the sharpest fall being in Queensland, where there is considerable speculation around the upcoming State Budget.
130 120 110 100 90 80 70
Sources: Westpac Economics, Melbourne Institute

Consumer Sentiment
index index 130 120 110 100 90 80 70 60 Aug-94 Aug-98 Aug-02 Aug-06 Aug-10

60 Aug-90

There were falls in four of the five components of the Index. The sub-index tracking views on family finances compared to a year ago fell by 6.3% whereas the sub-index tracking expectations for finances over the next 12 months increased by 3.3%.The sub-indexes tracking consumer views on the economic outlook both deteriorated with the 12 month outlook down 3.1% and the 5 year outlook down 2.7%. The sub-index tracking opinions on whether now is a good time to buy a major household item fell by 3.6%. We have been particularly worried about households assessments of their finances over the next 12 months. It is mildly encouraging that this component has increased by 6.4% over the last two months, likely reflecting the direct boost from fiscal payments and rate cuts, but it is still 7.2% below its read as recently as March which coincided with the period of strong retail spending. The Reserve Bank Board next meets on September 4. We do not expect a rate cut. However, despite current media speculation, we do believe that the case for further cuts is likely to be clear by the December quarter. The critical issues will be around the sustainability of the recent surge in consumer spending; the resilience of the labour market; and developments in the world economy. With fiscal policy consolidating and the Australian dollar likely to remain high, adjustments in monetary policy are likely to be the only policy option available if further assistance is required. Private sector interest rates are only slightly below average levels. There is adequate scope for further monetary assistance. Todays report provides some gentle support for the prospect that lower interest rates may be needed later in the year Bill Evans, Chief Economist

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

Consumer sentiment August 2012

avg* Consumer Sentiment Index Family finances vs a year ago Family finances next 12mths Economic conditions next 12mths Economic conditions next 5yrs Time to buy a major household item Time to buy a dwelling Time to buy a vehicle
Source: WestpacMelbourne Institute

Aug 2010 119.2 95.5 119.0 127.1 115.5 138.8 119.3 138.2

Aug 2011 89.6 71.8 87.0 73.2 88.3 127.7 114.6 120.8

Jul 2012 99.1 83.5 88.9 95.8 97.5 130.0 128.8 130.8

Aug 2012 96.6 78.2 91.8 92.8 94.9 125.4 118.5 126.3

%mth 2.5 6.3 3.3 3.1 2.7 3.6 8.0 3.5

%yr 7.8 9.0 5.5 26.7 7.5 1.9 3.4 4.5

101.7 90.0 108.6 90.2 90.8 127.9 122.3 121.6

*average over full history of the survey, all figures except dwelling and vehicle indexes are seasonally adjusted

Survey interviews are conducted by OZINFO Research on the telephone using trained interviewers. Telephone numbers and the household respondent are selected at random. This latest survey is based on 1200 adults aged 18 years and over, across Australia. It was conducted in the week from 6 August to 10 August 2012. The data have been weighted to reflect Australias population distribution. Copyright at all times remains with the Melbourne Institute of Applied Economic and Social Research.

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