14 JUNE 2013

Boost in Consumer Confidence

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 has been conducted monthly since 1986.

The Index of consumer confidence rose by 4.7 per cent and is up 6.9 per cent over the year. 

The rebound in consumer confidence was certainly a surprise, especially given the falling Aussie dollar, rising fuel prices and fall in share markets.  All three factors would generally make households a little bit more despondent about life.  However, this time round confidence lifted well back into optimistic territory.  The key defining factor that could have supported the boost in confidence is the Reserve Bank’s decision to leave interest rates unchanged earlier in the month.

Last month the central bank cut interest rates and confidence levels took a bath however this time round interest rates were left on hold and consumers felt more comfortable about the outlook.  What is clear is that the Australian economy has changed.  Cutting interest rates from 6% down to 5% provides a significant benefit across the economy however when rates are cut from already super low levels to 53 year lows, it does send the message that there may be something wrong with the health of the domestic landscape.

Another defining factor is that the value of term deposits in the economy is actually greater than the value of owner occupied home loans.  So when rates are cut, interest income is reduced by a larger proportion than the reduction in owner occupied mortgage repayments.  Looking forward, the impact of further rate cuts is likely to be muted.

The knee-jerk lift in confidence is all well and good, but the key question is what people do now.  And it’s clear that many consumers are intent on being cautious about their investment options.  In fact the latest readings on what consumers would do with any additional savings suggest that conservatism is still the big driver.

Around a third of Aussies believe the wisest place for new savings is in the bank, while investing in shares tracked modestly lower.  It is clear that the ongoing global economic concerns, weakness across an array of sectors and a sluggish labour market are seeing households remain hesitant about the economic landscape.

Encouragingly, housing was looked at more attractively with real estate more in favour – with super low rates, the jobless rate low, no oversupply of properties, there are plenty of good reasons to be looking at property.

The Reserve Bank is likely to be encouraged by the latest consumer confidence results.  There are plenty of good reasons to be encouraged by the state of the economy, but it is likely that the shifts in the Aussie dollar, fuel prices and share markets will dominate sentiment – particularly in the lead up to the election.

Many expect the Reserve Bank to maintain its easing bias but it may not follow through with another rate cut until later in the year.

The outlook for retailers is mixed.  Consumer confidence is OK without being great, but wages are rising at a faster rate than prices.  Unemployment is low, interest rates could be cut again, home prices are lifting gradually.  Overall, consumers need to be positive about their finances before retailers can become more confident on future spending.

Patrick Malcolm, AFP®
Financial Planner
Authorised Representative No. 278061

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