Australia | Nov 12 2008
By Andrew Nelson
Getting good news in the current market is like scratching an itch that’s been driving you nuts. Because it feels so good. That much can be said for today’s Westpac-Melbourne Institute Index of Consumer Sentiment, which rose by 4.3% in November and shows the RBA’s recent 1.75% of rate cuts and the Commonwealth government’s $10.4bn stimulus package is having a positive effect on the mindset of consumers throughout Australia. All up, the index rose to 85.5 in November from 82.0 in October.
Westpac Chief Economist Bill Evans cautions that we shouldn’t get too excited about the result, as the index is still 22.6% below last year’s level and 14.5 index points below the point where optimists and pessimists are in equal numbers. He notes that we are still in the midst of the longest period of pessimists outnumbering optimist since the recession in 1990-91.
Since the October survey, rates have been cut by 1.75% by the RBA, the federal government doubled the first home owners grant for established homes plus it tripled the grant for new construction, and bank deposits were guaranteed. Evans also notes that the banks have passed on the bulk of the rate cuts, seeing the prime variable mortgage rate fall by 1.56%-1.63%. A 12.5% fall in petrol prices would also have helped.
And thus everybody was a little happier.
However, Evans notes that it wasn’t all one way traffic, with consumers having to contend with a raft of negative and sometimes alarming news as well. The government’s guarantee of deposits for institutions regulated by APRA left many worried about the restrictions placed on the access to their savings and the security of their savings in institutions not regulated by APRA. Also, the savings in direct shares and superannuation were hit hard by a 14% decline in share markets.
There was also non-stop talk of falling house prices and a plummeting AUD and let’s not forget the ever increasing use of the ‘R’ word in terms of both the global and local outlook.
Breaking down who liked what, the confidence of tenants was up by 11.1%, while that of mortgage holders only increased by 2.9%. Evans thinks this is due to lower income earners responding more positively to the stimulus package. This is evidenced by the 14.4% increase in confidence of those that earn less than $20,000 per year, with the one off payment to pensioners in the stimulus package probably responsible for the 10.3% jump in the index for the oldest age group.
Westpac estimates that around 30 to 40% of the fiscal stimulus payments will be spent.
The increase in the First Home Owners Grant coupled with the rate cuts had a very positive impact on sentiment towards housing, notes Evans, with the belief that now is a good time to buy a house jumping by 21%.
On the downside, banking sector turmoil, tumbling share markets and concerns about other investments saw the average consumer’s assessment of personal finances relative to a year ago fall 7.8%. Expectations for finances over the next 12 months fell by 0.1%. Evans notes that rate cuts usually see consumers become more positive about the near term outlook, but despite the recent and massive cuts, confidence about economic conditions over the next 12 months actually fell by 1.8%. This leaves Evans thinking that the RBA “has more work” if it is to rebuild household confidence in the near term.
In the medium term, things are looking much better notes Evans, with the outlook for economic conditions over the next 5 years jumping by 15.7%. This is the biggest increase in that component since July 2000, he points out. Retailers should also take away a bit of optimism from the result, with opinions on whether it is a good or bad time to buy a major household item surging by 15.8%, up from last month’s all-time low.
What does it all add up to? At least one more big rate cut predicts Evans. He thinks the RBA will want to keep pushing through rate cuts to achieve an expansionary footing to help stimulate spending. Given that not all of its rate cuts have been passed down to consumers from the banks and that after its December 2 meeting there won’t be another one until February 3, Evans is predicting a 75bp cut to keep the ball rolling.