Australia | Jun 10 2009
By Rudi Filapek-Vandyck
The Westpac Melbourne Institute Index of Consumer Sentiment rose by 12.7% in June from 88.8 in May to 100.1 in June.
What makes the June reading for the index so special, Westpac economists point out, is that it marks the second largest recorded increase in the Index since the survey began in 1974 and the largest increase in the last 22 years.
The economists believe it is very likely that the dominant factor behind this extraordinary rise was the release of the March quarter national accounts last Wednesday which registered a small but nevertheless positive growth rate for the Australian economy in the March quarter. This unexpected positive result followed a contraction in the economy in the December quarter.
From the Australian consumers’ perspective the news was extremely encouraging as they had already benefited from a 385 bp cut in the variable mortgage rate plus around $14 bn of direct government transfers with another $5bn to come. The unemployment rate had actually fallen in April to 5.4% so on the assumption that Australia had avoided a recession and the worst had passed, consumers have become much more confident.
The economists point out the significance of the word “recession” to consumers was previously highlighted in March 2001 when the Index fell by 13.2% following the release of the December quarter 2000 national accounts which showed negative growth and was hailed in the media as portending a recession. The Index snapped back with an 11.6% jump when March quarter data showed the economy rebounding.
Westpac economists do however warn the positive reaction in June is probably premature. They point out the March quarter national accounts still portrayed a very weak economy with domestic spending falling by 1%, marking the sharpest fall since December quarter 2000. Overall GDP growth was positive because imports contracted by an extraordinary 7.0% allowing net exports to contribute 2.2 ppts to GDP growth and ensuring a positive result.
The economists expect this net export effect to partially reverse in the next two quarters with GDP registering consecutive negative quarters of growth and as such re-establishing the “recession” label. Maybe this is as good as any time to point out that Westpac is not the only one who has pencilled in negative growth for the next few quarters?
If correct, this potentially points to a negative shock to sentiment when the June quarter GDP figures are released in September.
Other factors would also have contributed to this stunning result, such as rising share markets and ongoing news about stimulus packages by governments worldwide.
Westpac economists point out four of the five components of the Index increased. These increases were led by economic expectations with “economic conditions over the next 12 months” up by 37%; “economic conditions over the next 5 years” up by 20.2%. Assessments of family finances were also strong with “expectations of family finances over the next 12 months” up by 11.1% and “family finances vs a year ago” up by 8.1%. The only component that fell was “time to buy major household items” which was down by 1.6%.
Overall the “Current Conditions” Index was up by only 2.2% compared with 20.7% for the Expectations Index. That emphasis on expectations is similar to the recent result for the US Index, the economists point out, when Expectations were up by 10.0% and current conditions fell by 0.9%.
Westpac economists are of the view that the “Current Conditions” is a more reliable indicator of the likely outlook for consumer spending. It is their assessment that averting a recession was the main driver of the result, a view supported by the News Heard Index. This Index showed that 77.5% of respondents recalled news items on Economic Conditions with the next highest categories being “Interest rates” on 23.9% and “International Conditions” on 19.2%. The economists note there was a sharp improvement in respondents assessments of all those categories compared to the last measure in March.
With purchases of housing and motor vehicles seen as the most cyclical components of expenditure there was further good news on “Time to Buy a Dwelling” and “Time to Buy a Car” indices. The former is up 2.5% since March and now 80% since last June. The car industry would be buoyed by an 8.7% increase in that Index since March and a 51% increase since last June.
Interestingly, Westpac reports the increase in confidence has encouraged respondents to raise the risk profile of their investments. The proportion of respondents who assessed banks as the wisest place for their savings fell by 5.7 ppts from 32.8% in March to 27.1%. In contrast, the proportion of respondents who favoured shares increased by 5.6 ppts from 6.7% in March to 12.3%.
