Fall In Consumer Sentiment Might Keep RBA On Hold

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This story features JB HI-FI LIMITED.
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By Chris Shaw

JB Hi-FI ((JBH)) may have lifted earnings guidance this week but the recent downgrade from Clive Peeters ((CPR)) seems more indicative of the state of the Australian economy as consumer confidence has fallen to its lowest level since 1992 according to the Westpac – Melbourne Institute Index of Consumer Sentiment.

The June reading of the Index showed a 5.6% fall to a reading of 84.7 points, down 30% from a year ago, putting it at a level equal to when the economy was recovering from a recession in the early 1990s. This quite a surprising outcome according to Westpac chief economist Bill Evans.

Part of the surprise in Evans’s view was the fact the fall was not linked to any hike in interest rates, which is usually the case. Only in September 2005 has there been a larger monthly fall in the Index without an accompanying increase in rates and that was due to a sharp jump in petrol prices. This leads him to suggest the fuel price runs second only to interest rates in impacting on consumer sentiment.

TD Securities senior strategist Joshua Williamson agrees fuel prices are taking their toll, though so too are higher interest rates, food and dwelling prices and this combination means economic activity levels are likely to go lower still in coming months.

Within the composition of the Index Evans notes three of the five categories fell sharply from their levels of May, these being the assessed state of family finances, expectations for economic conditions and the outlook for the economy over the next five years. These three Index components are all well down from year ago levels.

As a sign consumers are becoming more cautious the survey shows bank deposits are seen as the safest place for savings at present, while the stockmarket is also more attractive than was the case in May. In contrast, only 14.7% of respondents see real estate as the wisest place to invest now, down from 17.5% last month.

This erosion in confidence means consumer spending is also likely to fall and Williamson suggests the big question is by how much, with scope in his view for retail sales to turn negative in real terms in coming months. Not only would this impact on GDP, it would also have an effect on employment given the retail sector is very labour intensive.

Given the state of consumer confidence Williamson doesn’t expect the Reserve Bank of Australia (RBA) will deliver the rate hike financial markets are currently pricing in, maintaining the view the next move on rates will be down and could come as early as before the end of this calendar year.

Evans also doesn’t expect a rate hike when the RBA meets at the beginning of next month, taking the view it will want to further monitor economic data in coming months until it can get a better reading on the extent of the economic slowdown and the outlook for inflation.

The major concern in his view is the fall in the Consumer Sentiment Index this month has come about largely because of inflation expectations and not because of higher interest rates and this suggests inflationary expectations are being built into the economy, an outcome the RBA will be wanting to keep under control.

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