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Reserve Bank and consumers more confidentReserve Bank Board minutes; Consumer sentiment
Consumer confidence: The weekly ANZ/Roy Morgan consumer confidence rating rose by 1.2 per cent to 116.5 last week – the highest level in 21 weeks and still well above the long-run monthly average of 112.9.
Reserve Bank Board minutes: The minutes from the December 5 Board meeting were issued. The Board’s neutral policy bias remain intact with a period of record low interest rate stability ahead for the foreseeable future. It noted that “over the prior year or so, the unemployment rate had fallen and inflation had moved closer to target.” The Reserve Bank Board minutes provides guidance on interest rate settings. The consumer confidence figures have implications for retailers, and other consumer-focussed businesses.
What does it all mean?
Aussie consumers are feeling festive. This is the second consecutive week of positive consumer confidence data releases. Last week, the monthly Westpac-Melbourne Institute sentiment survey for December rose to 4 year highs. In the final reading for 2017, the ANZ-Roy Morgan confidence index for the week ended December 17 rose to 21-week highs.
Four out of the five underlying components of the index increased. Confidence around the economic outlook and conditions is gaining traction and is now at the highest point in 2017. The strong jobs and business survey reports released last week has buoyed consumers. We’ve had 14 consecutive months of job gains. The last time this occurred was the period from August 1979. It has been an exceptional year for jobs growth – the second fastest annual increase on record – with around 383,300 jobs created over the past year. And the smoothed measure of business conditions stands at 9-year highs amid strong business investment and corporate profitability.
Consumer views on their finances, however, remains subdued. Record low interest rates are supportive, but Aussies remain non-plussed about their take home pay. Anaemic wages growth is weighing on sentiment, despite wages growth remaining marginally ahead of consumer prices. Elevated household debt, rising utility bills and petrol prices – which are currently at 3-year highs – are additional imposts on stretched household budgets. Cooling house prices in Sydney may also be starting to weigh on consumers after such a strong run of growth. 
In a concerning development for Australian retailers during the all-important Christmas trading period, household sentiment around the ‘time to buy a household item’ fell and is now slightly below its long-run average level. The Aussie dollar has fallen back to around US76-77 cents in recent months after reaching US80-81 cents in mid-September. This may also be restraining spending.
Interestingly, the measure of inflation expectations 2 years ahead rose to 5-week highs of 4.6 per cent. Perception and reality are clearly two different things given persistently low wages growth and retail deflation.
The Reserve Bank Board minutes covered policy makers’ discussions about the Aussie economy prior to the release of the September quarter national accounts, the November employment report and the US Federal Reserve increasing interest rates. While the communiqué is a little dated, it does provide observers with useful insights into the likely direction of monetary policy.
The Board’s neutral policy bias remains intact with a period of record low interest rate stability ahead for the foreseeable future. It noted that “over the prior year or so, the unemployment rate had fallen and inflation had moved closer to target.”
The Bank maintained, however, its upbeat assessment of the Australian economy, expecting annual growth of around 3 per cent over the next few years, potentially laying the groundwork for an interest rate hike in late 2018 or early 2019. Notably “the outlook for non-mining business investment had improved further and the pick-up in public infrastructure investment was also supporting overall growth.”
Forward looking indicators of labour demand imply that employment growth “will be somewhat above average” over the next few quarters.
As expected, a considerable amount of attention was given to the wages growth ‘puzzle’ (i.e. jobs growth/wages link) perplexing economists globally. The Board noted that “in the major advanced economies, labour market conditions had continued to tighten, but wage growth and core inflation had remained low.” How far and when stronger conditions in the economy and labour market might feed through to higher wages growth and inflation “remained important considerations shaping the outlook”. Though wage growth appeared “to have stabilised at a low rate” in the September quarter.
The outlook for household consumption “continued to be a significant risk, given that household incomes were growing slowly and debt levels were high.”
On global conditions the Bank opined that while the global macroeconomic backdrop had improved, “commodity prices and Australia’s terms of trade were expected to decline in the period ahead, but to remain at relatively high levels. The Australian dollar had continued to fluctuate within its range of the preceding two and a half years. An appreciating exchange rate would be expected to result in a slower pick-up in domestic economic activity and inflation than currently forecast.”
What do the figures show?Consumer sentiment
The weekly ANZ/Roy Morgan consumer confidence rating rose by 1.2 per cent to 116.5 – its highest level in 21 weeks. It was the fourth gain in six weeks. Confidence is down 3.0 per cent over the year, but well above the average of 113.2 since 2014 and average of 112.9 since 1990.
Four of the five components of the index rose in the latest week:
• The estimate of family finances compared with a year ago was up from +3.0 to +6.7;• The estimate of family finances over the next year was up from +23.5 to +24.1;• Economic conditions over the next 12 months was up from +5.6 to +8.1;• Economic conditions over the next 5 years was up from +9.4 to +10.6;• The measure of whether it was a good time to buy a major household item fell from +34.3 to +32.7.
The measure of inflation expectations 2 years ahead rose from 4.5 per cent to a 5-week high of 4.6 per cent.
Reserve Bank Board minutes:
Last paragraph: “Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
“Over the prior year or so, the unemployment rate had fallen and inflation had moved closer to target. Members noted that this had occurred at the same time as risks in household balance sheets had lessened. Recent data had increased confidence that there would be further progress on these fronts over the following year.”
“A sustained pick-up in spending on public infrastructure could even ‘crowd in’ additional investment by the private sector firms undertaking those projects on the public sector’s behalf.”
“Members recognised that this combination of strength in economic activity and low inflation was a central issue in the global economy. It was possible that this combination could continue for a while yet.”
What is the importance of the economic data?
The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.
The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.
What are the implications for interest rates and investors?
The better-than-expected recent consumer confidence readings provide us with cautious optimism that consumer confidence and restrained retail spending may have bottomed. That said, consumers remain constrained by subdued pay rises, elevated mortgage debt and rising bills. Moreover, retailers are under pressure from increased global competition and technological disruption, which is deflating goods prices and weighing on profits.
The Reserve Bank appears in no rush to change its interest rate settings. In fact, if the Reserve Bank is right, and the link between employment and wages is not working as economics textbooks indicate, then the interest rate lever may not need to be pulled for quite some time. The central bank, however, appears more optimistic that employment growth will continue into 2018 and that wages growth seems to have bottomed in the September quarter.
While we expect spare capacity in the economy and a tightening labour market to eventually lead to gradual pay increases for Aussie workers, the labour market participation rate has increased to 6-year highs of 65.5 per cent. The strong labour market is encouraging more people back into the labour market and potentially enabling employers to keep wages in-check, despite evidence of skills’ shortages emerging in some occupations.
CommSec expects official rates to remain stable until at least late 2018.
Originally published by Ryan Felsman, Senior Economist, CommSec