Bulletin

10 October 2012

Consumer Sentiment up only slightly

The Westpac Melbourne Institute Index of Consumer
Sentiment increased by 1% in October from 98.2 in September to 99.2 in October.
130 120

Consumer Sentiment
index index 130 120 110 100 90 80 70
Sources: Westpac Economics, Melbourne Institute

This is another disappointing result. There were a number of reasons to have expected the Sentiment Index to have increased by more than only 1%. Firstly, and most importantly, the Reserve Bank cut its overnight cash rate by 0.25% from 3.5% to 3.25%. Unlike some moves by the Bank which are fully expected by the media and therefore may not have a marked impact on confidence this move was not widely expected and therefore should have registered as a pleasant surprise for respondents. Instead we saw the sentiment of those folks with a mortgage hardly move with a miniscule 0.6% increase. Of course a likely complication was the response of the major banks, most of which only announced their mortgage rate reductions on October 5 five days into the seven day sample period with reductions ranging from 0.18% to 0.20%. It is of some concern that the Consumer Sentiment Index is still significantly below its level of last November following the first 25bp cut in the overnight cash rate. Since that time the Reserve Bank has cut the overnight rate by a further 125bps but the index is now 4.1% lower. Secondly, we saw a surprise fall in the unemployment rate from 5.2% to 5.1% reported for August. In that regard, however, we have seen consistent evidence from consumers unemployment expectations that despite a low print on the unemployment rate the vast majority of consumers have been expecting and continue to expect unemployment to rise. News from overseas should also have buoyed consumer confidence. The announcements of unlimited quantitative easing by the US Federal Reserve and the provision of an unlimited bond buying facility by the European Central Bank were very positive developments. Accordingly we saw a 3.9% increase in Australias share price index since the last survey while on the domestic front house prices appear to have stabilised and in some cities housing markets generally are beginning to show some tentative early signs of recovery. The October print of the Consumer Sentiment Index represents the eighth consecutive month it has been below 100, indicating that pessimists outnumber optimists. It is the fourteenth month in the last sixteen that the index has been below 100. That compares with the February 2008 May 2009 period when the index was below 100 for sixteen consecutive months. That last period of sustained weakness was followed by a strong and sustained surge with the index posting consecutive increases of 12.7%; 9.3%; 3.7%; 5.2%; and 1.8% in the five months from May 2009. The surge followed: official evidence that Australia had avoided a recession; a huge fiscal stimulus (around 5% of GDP); a cumulative reduction in the overnight cash rate of 425bps over the previous six months; and a large, globally coordinated round

110 100 90 80 70 60 Oct-90 Oct-94 Oct-98 Oct-02 Oct-06 Oct-10

60

of stimulus packages from the major economies (most notably China). In contrast, the situation now has: fiscal policy firmly in the contractionary zone; growth surprises looking more likely to be to the downside; the overnight cash rate only having fallen by 150bps; and, apart from China, the major economies unable to undertake further stimulus. As such, a 2009style recovery looks decidedly unlikely this time around. Despite the subdued headline there were some slightly more promising signs in the October survey detail. Three of the five components of the Index increased and two were down. Encouragingly both components around family finances increased: the sub-indexes tracking views on family finances compared to a year ago was up 5.3% and expectations for family finances over the next twelve months was up 2.8%. We had been very concerned about the weakness in the finances outlook series back in June when it was at levels comparable with the depths of the global financial crisis. It has since increased by a healthy 14.6%. This improvement may be partly due to less intense concerns around the introduction of a price on carbon emissions although the overall performance of the component remains disappointing (up just 1.6% since November last year). In a promising sign for retailers, the sub-index tracking views on whether now is a good time to buy a major household item also increased by 3.7%. Weakness centred on views around the economy. The sub-index on economic conditions over the next 12 months fell by 2.4%; while the sub-index on the five year economic outlook was down by 4.6%. The most encouraging result from todays survey came from the index tracking views on time to buy a dwelling which surged 9.6% to be up 17.9% in two months and reaching its highest level since September 2009 the last period when the sentiment overall was surging strongly. This message is consistent with other recent evidence of firming auction clearance rates. The response of the housing market to the recent rate cuts will be very important to watch.

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.

The Reserve Bank Board next meets on November 6. We expect that the Board will decide to cut the overnight cash rate by a further 0.25%. Our forecast for this cut has been in place since May this year with our forecasts around global uncertainty; softening domestic growth; a weak labour market and dormant inflation all setting the scene for another move by the Bank. In May we also pointed out that the overnight cash rate was unlikely to bottom out by years end with a further cut to 2.75% likely early in the new year. Evidence like todays underwhelming Consumer Sentiment report points to the need for further reductions in rates. Bill Evans, Chief Economist

Consumer sentiment October 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

Oct 2010 117.0 93.7 107.5 127.0 110.0 146.7 110.3 137.4

Oct 2011 97.2 81.6 98.1 86.2 96.0 124.4 118.2 124.2

Sep 2012 98.2 78.4 96.2 93.3 98.1 124.9 127.6 126.1

Oct 2012 99.2 82.6 98.9 91.1 93.6 129.6 139.8 134.6

%mth 1.0 5.3 2.8 -2.4 -4.6 3.7 9.6 6.7

%yr 2.0 1.2 0.8 5.7 -2.5 4.2 18.2 8.4

101.7 90.0 108.6 90.2 90.8 127.9 122.5 121.7

*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 1 October to 7 October 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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