Confident consumers still keen to pay down debt: CommSec
EXPERT OBSERVATION
The ANZ/Roy Morgan weekly consumer sentiment jumped 6.5 points (5.6%) to 21-week high of 123.0 points.
The Westpac/Melbourne Institute survey of consumer sentiment index rose by 0.3% to 102.1 in June. The index is above its long-term average of 101.5. A reading above 100 denotes optimism.
In the latest quarterly survey 22.5% of respondents thought the ‘wisest use of savings’ was to pay down debt.
In the Reserve Bank Governor speech entitled “Productivity, wages and prosperity” the Governor highlighted evidence of a growing “skills shortage” in Australia.
The consumer confidence figures have implications for retailers, and other consumer-focussed businesses.
What does it all mean?
When you weigh all the ‘big picture’ influences, Aussie consumers have little to be despondent about. The economy has completed 26 years of uninterrupted economic growth and the pace of annual growth now tops 3%. But inflation is contained, interest rates are at generational lows, unemployment is below the long-term average and sharemarket returns are up more than 10% on a year ago. The main worry is the high price of petrol and the fact that Aussie consumers and travellers would probably like the Aussie dollar a little higher than where it is currently.
Rising home prices didn’t drive consumer sentiment higher in the past few years and the rebalancing probably won’t lead to weaker consumer confidence. Overall, consumers tend to keep everything in perspective. In most capital cities, home prices have posted solid gains over the past five years.
Roy Morgan believes that the early start to winter clearance sales by department stores and chains may have also been a factor in lifting confidence last week.
While consumers are confident, they also remain conservative. Almost a quarter of consumers surveyed thought the wisest use of new savings was to pay down debt – the second highest response behind leaving the money in the bank. Almost 12% thought real estate was the best investment with around 9% opting for shares.
The Reserve Bank Governor has continued to indicate that the next move in interest rates will be up, but the move is “still looks to be some time away”. There needs to be a lift in inflation and wages before the Board is confident to lift rates.
The Reserve Bank Governor has highlighted growing evidence of a “skills shortage” in Australia. Governor Lowe believes this adds to the case that higher wages and prices are in prospect. However he stresses that this will be a gradual process.
The Reserve Bank Governor said the design of the tax system was important for future productivity. He didn’t elaborate on the point – perhaps he should have.
What do the figures show?
Weekly consumer confidence
The ANZ/Roy Morgan weekly consumer sentiment jumped 6.5 points (5.6%) to 21-week high of 123.0 points. All five components rose in the latest week.
Monthly consumer confidence
The Westpac/Melbourne Institute survey of consumer sentiment index rose by 0.3% to 102.1 in June. The index is above its long-term average of 101.5. A reading above 100 denotes optimism. The survey was conducted from June 4-10.
The current conditions index rose by 2.4%, but the expectations index fell by 1.0%.
Three of the five the components of the index increased in March:
- The estimate of family finances compared with a year ago rose by 4.5%;
- The estimate of family finances over the next year rose by 2.8%;
- Economic conditions over the next 12 months fell by 1.0%;
- Economic conditions over the next 5 years fell by 3.1%;
- The measure on whether it was a good time to buy a major household item rose by 1.0%.
Housing outlook: A good time to buy a dwelling? The index rose by 4.5% in June is up by 16.3% from a year ago. And house price expectations fell by 7.3% and is down by 10.2% on a year ago.
Unemployment expectations: Unemployment expectations rose by 5.7% in June, but are down by 9.6% over the year.
Wisest place for savings: On the question of the ‘wisest place for savings’, banks (27.7%) led the way from paying down debt (22.5%). Only 11.6% of respondents selected real estate and 8.6% nominated shares. The proportion of consumers opting to put money in superannuation (6.8%) was the second highest in a decade. Only 4.6% of people said they would prefer to spend any extra savings. Interestingly the proportion of consumers favouring cash management trusts (3.3%) was at a 12-year high.
Reserve Bank Governor Speech
“The national accounts provided confirmation that the Australian economy is moving in the right direction. If this continues to be the case, it is likely that the next move in interest rates will be up, not down. It is, however, important to remember that the environment in which interest rates are increasing is also likely to be one in which people's incomes are growing more quickly than they are now. This will help.”
“One area that we continue to watch carefully is consumption growth. Over the year, household consumption rose by 2.9%. This is a reasonable outcome, although growth in the March quarter was on the soft side.”....”we are paying close attention to household finances.”
“While we can't be definitive about what constitutes full employment, most conventional estimates for Australia are that it means an unemployment rate of around 5%....It is possible, though, that we could do better than this, especially if we approach the 5% mark at a steady pace, rather than too quickly.”
The Governor has identified lower wage growth in the mining sector, increase in labour force participation, labour force underutilisation, and the fact that benefits of new technologies are accruing unevenly across the community as some of the factors explaining lower growth of wages.
“some pick-up in wages growth would be a welcome development. It would help deliver a rate of inflation consistent with the target, it would help with the debt situation and it would add to our sense of shared prosperity.... In my judgement, a return, over time, to a world where wage increases started with a 3 rather than a 2 is both possible and desirable.”
What is the importance of the economic data?
Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.
What are the implications for interest rates and investors?
Aussies remain optimistic. When you weigh up all the influences, it is easy to see why. More confident consumers are more likely to spend – positive for retailers. Rising employment, improved job security and stable interest rates represent a heady mix, giving shoppers the ammunition to embrace the mid-year sales.
CommSec doesn’t expect a change in official interest rates until early 2019. But the area to watch is the job market and especially survey evidence of skills shortages, leading to higher wages.
Craig James is the chief economist at CommSec.