Consumer sentiment has fallen to its lowest level since Malcolm Turnbull took office in September last year. According to the latest Westpac-MI index, consumer confidence fell 3.5% in January, to 97.3. This simply means that pessimists now outnumber optimists.
Well, so much for that famed Turnbull effect.
Anyone with a shred of intellect would’ve seen this coming from a mile away. When confidence surges on the back of political change, it rarely lasts. It drops as quickly as it shoots up because there’s no logic behind it. Change for changes sake rarely leads to permanent change. Like an initial boost when you land a new job, eventually you realise you still have to go to work every day.
Aside from this inevitable return to form, what else has changed? What is it about today that’s making consumers feel glum?
In truth, the better question might be: what isn’t?
We’re stuck in an economy that’s living on borrowed time. A recession seems unavoidable at this rate. Only its severity and length is in question. Australia cannot be the only major commodity exporter that keeps avoiding recession. We are not exceptional, just lucky.
What consumers are reeling from is the effects of spill over from international markets. Growth is weak wherever you look, and financial markets are on a downward spiral. Even the ASX is down by over 7% this year already.
Consumers can’t help but buy into the fear. As irrational beings, it’s in our DNA.
But apart from political coups, are things that different today than they were in September? If we’re being honest with ourselves, not really. The problems are a couple of months older, but they haven’t changed.
The only difference is that US interest rates are 0.25% higher than they were in September. But that’s barely made a ripple on global markets, let alone the Aussie economy.
Is it the weaker dollar that has everyone so worked up? The Aussie dollar is at US$0.69, down US$0.04. That’s had some effect on spending power in the economy. But it can’t explain why confidence is so much weaker.
If consumer confidence is so weak, why do we want to buy property now?
It’s important to remind you that it’s individuals that take these surveys. Not every one of them keeps up with global financial markets. They can overhear things, and imagine that things are much worse than they might really be.
What they know best is what’s relevant to them. They know what their financial position is like. They know how much money they have to spend on goods. And they have a fairly good idea of what their job prospects are like.
What they say gives us a fairly good idea of how they’re feeling about their finances. But it’s harder to gauge that sentiment when some of the findings seem to conflict.
Take for example the measure of family finances versus a year ago. The index showed this reading dropped 9.4% in January, the lowest level in six months. And, projected family finances over the next 12 months were down as well, falling 2.3%.
These figures tells you that families feel poorer than they did last year. Not only that, but they feel less optimism about the future ahead. But why is that?
House prices, while cooling, are still well up on last year. In Sydney or Melbourne, prices have risen by over 10% over the past year.
At the same time, unemployment remains steady at 5.8%. Compare that to this time last year when unemployment was at 6.4%. More people are in jobs, but confidence is weaker.
In addition to all this, oil prices at the pump remain low. That should be helping to boost spending elsewhere in the economy.
Wages might be growing at the slowest pace in two decades, but that was also the case last year. Sluggish wage growth has been a painful reality for some time.
So with house prices up, and unemployment low, why is consumer sentiment down?
It’s down to a combination of factors. For one, there are some question marks over the official employment figures. There were 127,000 jobs added in the two months between October and November. We haven’t seen figures like that in 30 years, not even during the mining boom. It seems incredible that the economy managed that at a time when business spending is so slack.
As for house prices, not everyone owns a home. And not everyone gets to bask in the feeling of prosperity that homeownership brings.
There are roughly 2.5 million homeowners that own property outright. Yet there are an equal number of Aussie homeowners still repaying their mortgage. And there are another two million people in the rental market too. These last two groups worry about what potential interest rate hikes could do to their bottom lines. Mortgage owners would see higher monthly repayments. And tenants would be at greater risk of seeing asking rents rise.
Throw in rising electricity prices, and everyone starts to feel stretched.
And yet, despite all this, Australians feel now is a good time to buy property. That reading rose from 99.2 to 113 on Westpac’s index. It also backed up a separate Westpac index, which looks at house price expectations. The most recent house price index rose 2.1%. From a reading of 103.7 in December, the index shot up to 125.8 in January. That’s down 10.2% over the year, but still the best result since September 2015. And all it means is that people believe house prices will head up in the future.
How do we account for weak consumer confidence when people feel it’s a good time to buy property?
Ultimately, it probably comes back to the volatility playing out on global markets. People are fearful, but they don’t really know why. They feel worried because someone has told them that they should be. Whether that’s right or wrong almost doesn’t matter. Once people are convinced the situation will get worse, they get tunnel vision.
Maybe the clue is in the title. After all, confidence is tricky to measure. You can gain it, and you can lose it just as quickly. But it tells us little about the underlying situation.
Household finances are probably in better shape than people let on. But that doesn’t mean they have no grounds for worrying about the future.
Junior Analyst, Markets and Money
PS: Australia’s unemployment rate is holding steady, but for how long? Weak growth prospects are forcing businesses to cut back on spending. This will ramp up in 2016, as weaker economic activity catches up with the labour market.
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