Reserve Bank content, but consumers cautious: CommSec

Joel RobinsonFebruary 19, 20180 min read

The weekly ANZ/Roy Morgan consumer confidence rating fell by 3.5 per cent last week. Sentiment towards household finances and the economy fell, despite a recovery in global stock markets and strong jobs data. However, the index remains above its long-term average of 112.9.  

Consumers’ inflation expectations rose to 4.7 per cent last week, up from 4.4 per cent in the previous week. This is the equal highest reading in 13 months. The consumer assessment comes at a time when US markets are pricing-in higher inflation. The strongest US wages growth since June 2009 prompted the market sell-off a few weeks ago.

Assistant Governor Michele Bullock spoke on “Household Indebtedness and Mortgage Stress” in Sydney this morning. The Assistant Governor allayed concerns about household debt and mortgage stress. She highlighted that the “the overall level of stress among mortgaged households remains relatively low”. She also cited the HILDA survey, suggesting that “mortgage repayments were not at levels that would indicate an unusual or high level of financial stress for most owner-occupiers”. In fact, “the number of households experiencing financial stress has fallen steadily since the mid-2000s”. This view is in contrast to some private sector surveys which have pointed to rising financial/mortgage stress and the negative impact on household consumption.

Reserve Bank Board minutes: The minutes from the February 6 Board meeting were issued. The Board’s neutral policy bias remain intact with a period of record low interest rate stability ahead for the foreseeable future. It noted that “inflation also remained low, but was expected to increase gradually as the economy strengthened and wage pressures rose over the forecast period.”

The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. The Reserve Bank Board minutes provides guidance on interest rate settings.


What does it all mean?

·         Political uncertainty in Canberra, falling home prices and lingering concerns about stock market volatility weighed on household’s views toward their finances and the economic outlook last week.

·         The weaker consumer confidence rating occurred despite record jobs growth and a recovery in share markets during the survey period. In fact, the Australian S&P/ASX 200 Index, while down so far in February (-1.6 per cent to February 19), has outperformed US equities (Dow Jones Industrial Index, -3.6 per cent).  

·         Aussie households are also acutely aware of global developments. Inflation pressures are building in the US. Rising inflation in the form of wages growth and interest rate anxiety prompted the recent sell-off on Wall Street.

·         The US is enjoying full employment with the unemployment rate at 16-year lows of 4.1 per cent. Strong jobs growth and a tightening labour market have contributed to average hourly earnings jumping to 2.9 per cent on an annual basis in January, the largest increase since June 2009. 

·         And on Friday, the US January core Consumer Price Index increased by 0.35 percentage points - the highest monthly result in 12 years.

·         Despite US economic outperformance, the Aussie labour market is strengthening. In fact, a record 16 consecutive months of jobs growth has been posted with the annual pace of jobs creation (403,100) the highest in 12½ years.

·         Record jobs growth has lifted the consumer sentiment rating off its most recent lows back in August. And while consumer prices remain subdued because of global competition, Aussies’ expectations for price rises are growing. Certainly buoyant business conditions and profits are pre-conditions for pay rises. Skilled job vacancies are beginning to emerge in some industries.

·         The Reserve Bank Governor Philip Lowe recently spoke about the benefits of stronger wage growth. He was concerned that annual wage growth near 2 per cent was seen as the new norm. Governor Lowe said that a 2.5 per cent inflation rate was consistent with a 3.5 per cent lift in wages. 

·         In today’s February meeting minutes, the Board surmised that “it was possible that ongoing strength in the demand for labour might result in wage growth picking up by more than anticipated, both in Australia and abroad.”

·         The Reserve Bank appears comfortable with the rebalancing of the Aussie housing market and overall levels of household debt. Putting things into perspective, Assistant Governor Michele Bullock concluded that “the overall level of stress among mortgaged households remains relatively low” and “mortgage stress has fallen over the past decade”.

·         The Assistant Governor also remarked that risks from “household mortgage stress are not particularly acute at the moment”, with large mortgage buffers and other data suggesting “mortgage stress has fallen over the past decade”. Similarly, for investors, Ms. Bullock noted that these mortgagees tend to have higher deposits, higher incomes, more assets, have been “resilient to the recent (regulatory) changes” and that the risk to financial stability from this source also “remained low”.         

What do the figures show?

Consumer Sentiment

·- The weekly ANZ/Roy Morgan consumer confidence rating fell by 3.5 per cent to 115.3. Confidence is down by 3.2 per cent over the year, but well above the average of 113.5 since 2014 and average of 112.9 since 1990.

- All five components of the index fell in the latest week:

- The estimate of family finances compared with a year ago was down from +5.9 to +4.2;

- The estimate of family finances over the next year was down from +25.2 to +23.6;

- Economic conditions over the next 12 months was down from +13.2 to +7.0; 

- Economic conditions over the next 5 years was down from +16.5 to +6.3; 

- The measure of whether it was a good time to buy a major household item was down from +36.9 to +35.6.  

- The measure of inflation expectations 2 years ahead rose to 4.7 per cent from 4.4 per cent.


Household Indebtedness and Mortgage Stress speech:

- Last paragraph: “The information we have suggests that, while there are some pockets of financial stress, the overall level of stress among mortgaged households remains relatively low.”

- “Appropriately prudent lending standards will continue to play an important role in ensuring that the financial system remains stable and households borrow responsibly.”

- On mortgage serviceability: “As recently as 2016, mortgage repayments were not at levels that would indicate an unusual or high level of financial stress for most owner-occupiers.” From the HILDA survey: “the median ratio of mortgage servicing payments to income has been fairly stable through time, remaining around 20 per cent in 2016”. Also, “financial stress for owner-occupiers with mortgage debt has not changed much over the past decade, and is actually lower than in the early 2000s. Around 12 per cent of such households indicated that they would expect difficulty raising funds in an emergency in 2016.”

- On measures of financial stress: “Banks' non-performing housing loans have been trending upwards over the past few years, although they remain very low in absolute terms at around 0.8 per cent of banks' domestic housing loan books. Much of this rise is attributable to a rise in non-performing loans in the mining-exposed states of Western Australia and Queensland – not unexpected given the large falls in employment and housing prices in some of these regions.”

- On investor borrowing: The recent increases in interest rates on investor loans, in response to APRA's measures to reduce the growth in investor lending, has probably affected the cash flows of investors. Interest rates on outstanding variable-rate interest-only loans to investors have increased by 60 basis points since late 2016. However, over the past few years, lenders have been assessing borrowers' ability to service the loan at a minimum interest rate of at least 7 per cent. So while interest rates and required repayments have likely risen, many borrowers should be relatively resilient to the recent changes.”


Reserve Bank Board minutes:

- Last paragraph: “Taking into account the available information, the Board judged that holding the stance of monetary policy unchanged would be consistent with sustainable growth in the economy and achieving the inflation target over time.”  

- “Members noted that global growth could continue to surprise on the upside, given the synchronised nature of the current upturn. Stronger demand could induce higher global inflation than expected, which would have implications both for financial asset prices and exchange rates. Stronger global growth would boost growth and inflation in Australia, particularly if the exchange rate were to depreciate.”

- “Household debt levels remained elevated and members agreed that household balance sheets still warranted careful monitoring.”

- “Strong competition in the retail sector, which had placed downward pressure on the prices of consumer durables and food for some time, was expected to persist in the next few years.”

- Business conditions had remained at a relatively high level in recent quarters. Private non-mining business investment had increased by more than expected in the September quarter, to be nearly 10 per cent higher over the preceding year. Members noted that the prospects for private non-mining investment were more positive than they had been for some time.”

- “Members observed that, while standard variable interest rates for housing loans had been little changed since mid 2017, the average outstanding variable rate had declined slightly as new and refinanced loans were typically being offered at lower rates.”

- “The unemployment rate was expected to decline a little further over this period to 5¼ per cent, consistent with GDP growth rising to be above potential.”  

- “Over 2017, progress had been made in reducing the unemployment rate and bringing inflation closer to target.”

- “There was still a risk that growth in consumption might turn out to be weaker than forecast if household income growth were to increase by less than expected.” 

- “Members noted that there had continued to be positive spillovers from the pick-up in public infrastructure investment, particularly in New South Wales and Victoria.”

- “The Australian dollar had appreciated a little on a trade-weighted basis over prior months, but had remained within the relatively narrow range in which it had been over the preceding couple of years.”

What is the importance of the economic data?

- The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.

The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.

What are the implications for interest rates and investors?

- Consumer confidence has improved since bottoming in August last year. Sentiment was at 4-year highs at the beginning of the year on the back of strong jobs gains and record low interest rates. The economic backdrop has not fundamentally changed despite recent share market volatility. 

- Political uncertainty in Canberra is nothing new to most Aussies. Hung parliaments and small government majorities have been the norm since 2010.

- But Aussie households are becoming acutely aware of building global inflationary pressures. All eyes will be on tomorrow’s quarterly Wages Price Index print.

- The Reserve Bank expects inflation to only increase gradually as the economy continues to strengthen on the back of robust business investment and infrastructure-related government spending. The global economic backdrop is supportive.

- The Bank’s liaison program also implied a recovery in retail sales following recent global competition-related weakness, a gradual rise in rents and a moderation in average outstanding variable mortgage rates.

- In an environment of weak income growth, household consumption and elevated mortgage debt remains an uncertainty this year. It is expected that as spare capacity in the labour market recedes over the year, this could boost wages growth, albeit gradually. 

- On a positive note, the Reserve Bank believes that Aussie mortgage stress is “relatively low”. And while debt levels are high, the number of owner-occupiers currently experiencing acute financial stress is not growing rapidly. 

- CommSec doesn’t expect a change in interest rates until late 2018 at the earliest.


Joel Robinson

Joel Robinson is a property journalist based in Sydney. Joel has been writing about the residential real estate market for the last five years, specializing in market trends and the economics and finance behind buying and selling real estate.
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