Consumer views on the economy hit two and a half year low: CommSec's Ryan Felsman

EXPERT OBSERVER

Aussie consumers remain downbeat. In fact, the weekly ANZ-Roy Morgan consumer sentiment index is down by 4.1 per cent between June 9 and November 17 2019 – the period in which interest rates have been lowered three times to a record low 0.75 per cent. Last week, the release of disappointing job and wage reports served to highlight the sense of unease Aussies are currently feeling about the economy. In fact, consumer views on ‘current’ economic conditions are now at the lowest level since April 23 2017.

While ultra-low interest rates are currently working their way through the economy and showing up primarily in rising capital city home prices, although rising unemployment, tepid pay rises and still-elevated household debt continue to restrain consumer spending intentions.

According to Commonwealth Bank (CBA) and Google trends searches data, measured household spending intentions edged higher in October. The modest upturn signals a potential improvement in consumer spending in the lead up to online retail shopping events - Black Friday and Cyber Monday - later this month, ahead of the all-important Christmas trading period.

The CBA gauge also revealed that consumer spending intentions on entertainment and travel are positive, suggesting that households are still keen to deploy their hard-earned coin on ‘pleasure pursuits’. But gyms and car dealerships remain under pressure as consumers’ rein-in non-essential spending on goods and services.

The rebound in home prices continues. The CoreLogic 5-Capital City Daily Home Value Index is up by 1.2 per cent so far in November, led by gains in Sydney (up 1.8 per cent), Melbourne (up 1.2 per cent) and Brisbane/Gold Coast (up 0.5 per cent). The lift in housing demand, supply constraints and record-low borrowing costs are pushing-up home prices – so it’s no surprise that home buying intentions are near record highs in early 2017, according to CBA Group economists.

What do the figures show?
Consumer Sentiment

The weekly ANZ-Roy Morgan consumer confidence rating fell by 1.1 per cent to 109.9 points. Sentiment is below both the average of 114.3 points held since 2014 and the longer term average of 113.1 points held since 1990.

Three of the five major components of the index rose last week:

1. The estimate of family finances compared with a year ago was up from +10.6 points to +10.9 points;

2. The estimate of family finances over the next year was up from +25.6 points to +25.8 points;

3. Economic conditions over the next 12 months was down from -7.0 points to -9.4 points;

4. Economic conditions over the next 5 years was down from +6.0 points to +0.8 points;

5. The measure of whether it was a good time to buy a major household item was up from +20.6 points to +21.1 points.

The measure of inflation expectations was down from 4.1 per cent to 3.8 per cent.

The CBA Household Spending Intentions Series (HSI) – October

On home buying intentions: “Home buying intentions rose further in October and are now close to the record highs seen in H1 2017. Current HSI readings are consistent with an ongoing pick up in dwelling prices. And also consistent with a turn in leading indicators of residential construction like building approvals.”

On retail spending intentions: “Retail spending intentions are bouncing around at present but the lift in October means a modest uptrend is in place.”

On travel spending intentions: “Travel spending intentions are turning up, albeit from low levels. The trend in Australian residents holidaying overseas has slowed. The pick-up in the Travel HSI may be an indication that a lower AUD [Aussie dollar] is encouraging domestic holidays instead.”

On health & fitness spending intentions: “Intentions to spend on health & fitness have levelled out. Households are willing to allocate scarce disposable income to driving health & fitness spending with little impact from the vagaries of the economic cycle.”

On education spending intentions: “Education spending intentions are high and rising. Policy makers and economic commentators can all see the need to lift productivity growth.”

On motor vehicle spending intentions: “Motor vehicle purchase intentions remain deep in negative territory. And the tentative signs of a turn up in the past few months have stalled.”

Reserve Bank November 5 Board minutes

Last paragraph – easing bias retained: “The Board concluded that the cash rate should be held steady at this meeting. As part of their deliberations, members also agreed that it was reasonable to expect that an extended period of low interest rates would be required in Australia to reach full employment and achieve the inflation target. The Board would continue to monitor developments, including in the labour market, and was prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.”

A rate cut was considered by the Board: “The Board agreed that a case could be made to ease monetary policy at this meeting…”

Impact on consumer confidence and savers: “While members judged that lower interest rates were supporting the economy through the usual transmission channels (including a lower exchange rate, higher asset prices and higher cash flows for borrowers), they recognised the negative effects of lower interest rates on savers and confidence. They also discussed the possibility that a further reduction in interest rates could have a different effect on confidence than in the past, when interest rates were at higher levels.”

Stimulus is working its way through the economy: “The established housing market was picking up, which would have positive spillovers for the broader economy, although the size of these spillovers was uncertain. Further evidence on spending by households was required before drawing a conclusion on the effects of the tax cuts and low interest rates. Having already delivered a substantial monetary stimulus in recent months, there was a case to wait and assess the effects of this stimulus, especially given the long and variable lags.”

Interest rate pause?: “The most appropriate approach would be to maintain the current stance of monetary policy and to make another full assessment once more evidence of the effects of the earlier monetary easing had become available.”

‘Gentle turning point’ reiterated: “The outlook for the Australian economy was little changed since August. After a soft period in the second half of 2018, GDP growth had picked up a little in the first half of 2019 and it appeared that a gentle turning point had been reached. Looking forward, growth was expected to strengthen gradually to 2¾ per cent over 2020 and around 3 per cent over 2021.”

On the job market: “The unemployment rate had remained steady at around 5¼ per cent and was expected to decline only gradually. Spare capacity was likely to remain in the labour market for some years.”

On inflation: “Inflationary pressures had remained subdued, held down by very low housing-related prices and slow growth in labour costs and administered prices.”

On the global economy: “Global financial markets were signaling a decline in pessimism, which, if sustained could lead to better-than-expected outcomes for the global economy.”

Financial markets pricing of future rate cuts: “Financial market pricing implied that expectations for a further reduction in the cash rate had been scaled back since the previous meeting, with some chance of a 25 basis point reduction around the middle of 2020.”

What are the implications for interest rates and investors?

According to the Reserve Bank Board’s minutes – released today - policymakers considered another rate cut at their meeting in early November. The Board, however, opted to ‘sit pat’, instead cautioning that “they recognised the negative effects of lower interest rates on savers and confidence.” And in light of its diminishing conventional monetary policy ammunition, Board members also emphasised that, “Having already delivered a substantial monetary stimulus in recent months, there was a case to wait and assess the effects of this stimulus, especially given the long and variable lags.”

That said, the Reserve Bank has retained its policy easing bias. Further evidence of a continuing loss of momentum in the job market could be the catalyst for another rate cut. In fact, Board members concede that “spare capacity is likely to remain in the labour market for some years” with little progress expected to be made boosting Aussies pay packets – two essential ingredients for an improvement in consumer spending and a pick-up in inflation.

CommBank Group economists have pencilled in an interest rate cut in February 2020, but view further fiscal initiatives as being more effective in delivering additional support for the economy.

RYAN FELSMAN is a Senior Economist at CommSec