Falling Consumer Confidence is Proof of the Coming Australian Recession

If you needed any more signs that Australia’s heading for a recession, you just got one. Adding to a week of poor economic data is news that consumer confidence is falling — and how.

The latest ANZ-Roy Morgan consumer index shows confidence fell to a 14 month low. Consumer sentiment is down 5.8% on last week. The index fell to 106.7 from a long term average of 112.7.

That’s a massive drop in the space of just one week. But it’s not altogether surprising, either. The Aussie economy officially just had its seven days from hell.

Last week, we saw that the economy grew at 0.2% in the second quarter. That was way below market expectations. Most economists had predicted growth of at least 0.4%.

Then we got wind of declining retail sales. Spending dipped 0.1% in July. That was after a 0.6% rise in retail sales in June. It was another shock to economists, who predicted a 0.4% increase in July.

Make no mistake; it was this latest economic data that tipped the scales. Consumer confidence was resilient in August for the most part. Even the carnage on global markets wasn’t enough to dampen spending.

Now you could make the argument that retail sales fell because of unusually high spending in June. The May budget played its part in lifting spending during that month. Small businesses were encouraged to spend with generous tax breaks.

But remember, this latest consumer confidence drop is a measure for this past week. That’s what makes the consumer confidence data so intriguing. Both it, and retail spending, have now experienced their biggest drops since mid-2014.

Thankfully, Aussie consumers are wising up to what’s going on. Everyone now knows just how bad things are, and how bad they might get. Thumbing through this data is enough to make the even biggest optimist sit back and take notice.

Why? Consider what’s facing the economy.

So far this year, the economy has grown 1.1%. At this rate, breaking 2% growth will come as something of an achievement.

The real concern though is the timing of these indicators. Following weak growth in Q2, we now face the very real prospect of a recession by Q3.

The worry is that poor Q2 growth will drag on consumer sentiment in the long run. If it does, it’ll hurt our economic prospects even more.

Economic realities are simply catching up with consumers. And that’s affecting their spending, as reflected in the data. In turn, their changing spending habits then affect future economic growth too. It’s a vicious cycle. Entering it is much easier than getting out of it.

But the speed of all this change tells us one thing: a recession is right around the corner.

A closer look at consumer confidence

Let’s take a closer look at why consumer sentiment fell so much this week.

Compared to a year ago, many of you feel your financial situation has worsened. The reading, down 3.5%, fell to 105.7. The next 12 months are equally concerning too.

Looking ahead to August 2016, most people felt their financial situation will worsen. The index reading fell 5.4%, to 120.5.

Household sentiments also matched attitudes on future economic conditions. Many of you feel that economic conditions will worsen over the next 12 months. That reading fell 6.3%, to 83.5.

What’s more, households plan to buy fewer big ticket items. The index plunged 8.4%, to 120.6.

Things were no better on a five year outlook either. The long term view on economic conditions dropped 5.2% to 109.0.

There’s a lot to take in from the figures above. But none of it is positive. What concern us most here are figures for the next 12 months though. After all, we’re talking about a recession coming as early as October.

The current consumer sentiment tells us that spending will certainly fall again.

If it does, how do we expect to match 0.2% growth in Q2? That’s the minimum requirement in avoiding a recession. A technical recession is two quarters of negative GDP growth.

Yet if we’re serious about avoiding a recession, consumers spending must rise. Why? Because no one else is spending. Businesses are holding back on expenditures because the returns on investments are poor.

What do businesses see now when they look at consumer confidence? They see a consumer base that plans to save, not spend. Do you think that will spur businesses into spending? No, me neither.

Business spending is further proof of an imminent recession

The only reason the economy grew at 0.2% in the first place was because of government spending. The government went big on defence spending in Q2, contributing to most of the growth. Without that, GDP growth would’ve flatlined completely.

But if we’re pinning hopes on a rebound in business spending, we best look elsewhere.

ABS figures show that business investments fell 4% during the quarter to June. Most economists expected a 2.5% decline instead. Total expenditures were down 10.5% for the year to June.

The resource sector remains weighed down by slowing revenues. Australia’s mining sector isn’t investing, loading responsibility on non-mining sectors to spend. The service sector actually saw investments rise 4.4% in the June quarter.

Unfortunately, it wasn’t enough to offset slowing mining investments. It’s left business spending at its weakest point since 1992. That just happens to be the last time Australia had a recession.

Consumers have just given them another reason to stop spending.

According to Markets and Money’s Greg Canavan, that makes a recession unavoidable.

Greg is one of Australia’s leading investment analysts. He thinks we’re on course for our first recession in 23 years.

In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals how we’ve found ourselves in this position.

Falling consumer confidence and retail sales are signs of our ills. These indicators are now catching up with longstanding problems with the economy.

Trade imbalances have been growing for the better part of a year. Meanwhile, government revenues are down, and household debt is up. It all adds up to a recession that’s coming sooner than you think.

But there is a silver lining in all this. There are actions you can take now to lessen the blows of the coming recession.

Download your free copy today to learn how to protect your wealth from the coming crash. To find out how to download his free report right now, click here.

Mat Spasic,

Contributor, Markets and Money

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money