21 Sep 2010

Consumer confidence falls: What this means for mortgage owners?

Consumer confidence slipped 5 per cent in September to 113.2, reversing a corresponding rise the previous month.

This fall was the first slide in two months prompting financial commentators to speculate that householders are expressing concern about the economic outlook.

Is this so or is it simply a blip?

The Westpac-Melbourne Institute Consumer Sentiment report, which represents a survey of 1,200 consumers conducted between 6 September and 12 September, was a somewhat surprising result according to Westpac chief economist Bill Evans considering September was “a month of positive news”.

As The Age points out during September the Reserve Bank kept the cash rate on hold for a fourth consecutive month, there was a sharp improvement in the labour market that saw the unemployment rate drop to 5.1 per cent, shares and the dollar rallied strongly and political uncertainty was resolved.

But it seems that although on paper optimism should be high, in practice it is a different story.

Evans told the ABC’s Lateline: “there is a degree of consumer caution all around the world now and it’s obviously related to the aftermath of the global financial crisis – the fresh memories that they have of potentially losing their jobs only a couple of years ago – and the fact that they do have higher levels of debt.”

The measure of consumer confidence is linked to Gross National Product (GNP) and expenditure. The conventional economic view is that uncertainties and irrational fears in the marketplace dictate economic trends and behaviour.

AMP Capital Investors chief economist, Shane Oliver, maintains that despite the fall, consumer confidence remains very high and at a level consistent with strong growth in consumer spending going forward.

Oliver’s take is that the drop in consumer confidence in September “doesn’t alter the outlook for further monetary tightening from the RBA with the next move likely to come next month”.

Evans is less certain. “This survey provides some insight into the fragility of confidence,” he said. It also “emphasizes that a premature resumption of rate hikes would probably severely impede the recent progress we have been making with the consumer”.

Evans doesn’t anticipate that the Reserve Bank of Australia Governor Glenn Stevens will start raising the cash rate before February. The central bank left the benchmark rate unchanged this month for a fourth straight month, citing weaker growth in the U.S. and Europe.

Stevens increased interest rates six times between October 2009 and May 2010, from a record low of 3 per cent to 4.5 percent.

The Westpac-Melbourne Institute Consumer Sentiment September survey revealed that the measure of what households expect the economy to do over the next 12 months fell 7.2 percent and over the next five years 6.1 per cent.

Lateline Business’ Simon Palan notes that one factor that is usually a positive indication of consumer sentiment is a rising Australian dollar and during this week the currency soared to levels not seen for two years.

(The dollar peaked at 94.57 US cents on Wednesday, a post GFC-high.)

NAB Capital’s Rob Henderson told Lateline that the strong Australian dollar was essentially a consequence of the weakness of the US dollar due to speculation that the Federal Reserve is about to begin buying one trillion dollars worth of Treasury bonds later this year to help spur growth in the slowing American economy and prevent it relapsing into recession.

An interesting aside is that while consumer confidence has fallen business confidence has surged. The National Australia Bank’s business confidence index released this week, rebounded to its highest level since the European debt crisis – from 2 in July to 11 in August – off the back of strengthening global markets.

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