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Consumer confidence hits 2-year low

Smallest increase in NSW homes in 5 years

Consumer sentiment; Home prices; Reserve Bank Board minutes

Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating fell by 3.5 per cent to a 2-year low of 109.3 points. Sentiment is below the average of 114.4 points held since 2014 and the longer term average of 113.1 points since 1990. Consumers’ views on ‘future economic conditions’ fell by 7.6 per cent to just 1.7 points – the lowest level since November 5 2017.

Home prices: The Bureau of Statistics reports that Australian home prices fell by 0.7 per cent in the June quarter to stand 7.4 per cent lower over the year. The number of residential homes in NSW rose by 10,500 to 3,201,100 in the June quarter – the smallest quarterly increase in five years.

Reserve Bank: Minutes of the September 3 Reserve Bank Board meeting were released. The Board held the cash rate at a record low of 1.00 per cent, but said, “Members would assess developments in both the international and domestic economies, including labour market conditions, and would ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”

Home price data is important for retailers, especially those focussed on consumer durables. The consumer confidence figures have implications for retailers and other consumer-focussed businesses. The Reserve Bank Board minutes provide guidance on interest rate settings.

What does it all mean?

• Aussie policymakers have much to ponder after the release of today’s disappointing consumer confidence data. Tax offset payments have hit consumers’ bank accounts, mortgage rates have been cut to around 50-year lows, the East Coast property market continues its revival and the Aussie sharemarket has rebounded so far in September. But Aussie consumers remain glum with sentiment hitting two-year lows.

• So why are Aussie consumers so cautious? Well the answer was in the minutes of the Reserve Bank Board’s September 3 meeting released today. Policymakers noted that “wages growth had remained low and the upward trend in wages growth appeared to have stalled.”

• And prospects for a decent lift in Aussie pay-packets is likely to remain elusive, given labour market spare capacity, with Board members acknowledging that, “forward-looking indicators had continued to suggest that employment growth would moderate over the following six months.”

• Much hinges on the continued recovery in residential property prices. Data released by the Bureau of Statistics for the June quarter today is “old news”. But the easing in household wealth to two-year lows in the quarter will not be lost on home owners, saddled with elevated mortgage debt.

• Aussie builders and construction workers are still faced with challenging conditions as residential dwelling investment continues to ease. In fact, the June quarter saw the smallest increase in the number of New South Wales homes in five years as building activity weakened. Encouragingly, however, Sydney and Melbourne home prices are up around 1 per cent in September so far, supported by strengthening home loan demand, following a strong recovery in prices in August.

What do the figures show?

Consumer Sentiment

• The weekly ANZ-Roy Morgan consumer confidence rating fell by 3.5 per cent to 109.3 points – the lowest level in over two years. Consumer sentiment is below the average of 114.4 points held since 2014 and the longer term average of 113.1 points since 1990.

• Four out of the five major components of the index fell last week:

The estimate of family finances compared with a year ago was down from +11.7 points to +6.6 points;

The estimate of family finances over the next year was down from +28.5 points to +22.3 points;

Economic conditions over the next 12 months was down from -5.9 points to -6.5 points;

Economic conditions over the next 5 years was down from +10.1 points to +1.7 points;

The measure of whether it was a good time to buy a major household item was up from +22.3 points to +22.6 points.

• The measure of inflation expectations rose from 4.0 per cent to 3.9 per cent.

Residential property prices – June quarter

• The Bureau of Statistics (ABS) has released its Residential Property Price indexes for the June quarter.

• The price index for residential properties for the weighted average of the eight capital cities fell by 0.7 per cent in the June quarter. The index declined by 7.4 per cent through the year to the June quarter.

• In the June quarter, capital city residential property price indexes fell in Darwin (down 1.8 per cent), Perth (down 1.4 per cent), Melbourne (down 0.8 per cent), Brisbane (down 0.7 per cent), Adelaide (down 0.6 per cent) and Sydney (down 0.5 per cent). But prices rose in Hobart (up 0.5 per cent) and Canberra (up 0.2 per cent).

• Over the year to June, residential property prices fell in Sydney (down 9.6 per cent), Melbourne (down 9.3 per cent), Darwin (down 5.0 per cent), Perth (down 3.9 per cent), Brisbane (down 2.7 per cent), Canberra (down 0.4 per cent) and Adelaide (down 0.1 per cent). However, prices rose in Hobart (+2.0 per cent).

• The total value of residential dwellings in Australia was $6,610,590.1 million at the end of the June quarter, falling $17,611.6 million or just 0.3 per cent over the quarter.

• The mean price of residential dwellings fell $4,400 to $638,900 and the number of residential dwellings rose by 43,100 to 10,437,200 in the June quarter.

• CommSec estimates that the number of people per home was steady at 2.45 in the June quarter.

• The value of all dwellings in Australia in the June quarter was 4.6 per cent lower than a year ago. Over the year, the value of homes was higher in Tasmania (up 3.8 per cent), South Australia (up 2.5 per cent) and the ACT (up 1.0 per cent). But home values were lower in NSW (down 5.9 per cent), Victoria (down 7.2 per cent), Northern Territory (down 3.9 per cent), Western Australia (down 2.1 per cent) and Queensland (down 1.1 per cent).

• The number of all homes in Australia rose by 43,000 in the June quarter to be up by 185,800 over the year.

Reserve Bank September Board minutes:

• The case for lower interest rates: “Members judged that it was reasonable to expect that an extended period of low interest rates would be required in Australia to make sustained progress towards full employment and achieve more assured progress towards the inflation target. Members would assess developments in both the international and domestic economies, including labour market conditions, and would ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”

• Consumer outlook: “A key uncertainty continued to be the outlook for consumption growth, which was expected to increase over time, supported by a gradual pick-up in growth in household disposable income and improvements in conditions in the housing market.”

• Retail spending: “The low- and middle-income tax offset (LMITO) was expected to boost household income, and thus support consumption growth, in coming quarters. However, the Bank’s liaison with retailers suggested that this had yet to lift spending noticeably. Members noted that even if the LMITO was used to pay off debts, this would still bring forward the point at which households could increase their spending.”

• Jobs market outlook: “Forward-looking indicators had continued to suggest that employment growth would moderate over the following six months. Information from liaison suggested employment intentions had remained weak in the residential construction sector but positive among services firms.”

• Wages outlook: “Wages growth had remained low and the upward trend in wages growth appeared to have stalled. The wage price index had increased by 2.3 per cent over the year to the June quarter. Private sector wages growth had been unchanged in the quarter, while public sector wages growth had been a little higher. Most of this increase had been the result of a one-off adjustment to equalise the wages of nurses and midwives in Victoria with those in New South Wales.”

• Inflation outlook: “Inflation pressures remained subdued, but inflation was expected to increase gradually to be a little above 2 per cent over 2021 as output growth picked up and the labour market tightened.”

• Housing market outlook: “There had been further signs of a turnaround in established housing markets, especially in Sydney and Melbourne, although housing turnover had remained low. Housing credit growth had remained subdued, although mortgage rates were at record low levels and there was strong competition for borrowers of high credit quality. Data on residential building approvals and information from the Bank’s liaison program suggested that there was likely to be further weakness in dwelling investment in the near term; members recognised that this could sow the seeds of an upswing in the housing price cycle at some point, particularly given the lengthy stages in the construction of higher-density residential housing.”

• Credit growth: “Demand for credit by investors continued to be subdued and credit conditions, especially for small and medium-sized businesses, remained tight.”

• Global trade & economy: “The main development over the previous month had been the escalation of the US–China trade and technology disputes.” And, “Weak global trade had continued to weigh on growth in east Asia. Trade within the region and with China had contracted further in June.”

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 Australian Bureau of Statistics (ABS) provides quarterly data on residential prices. The figures provide further perspectives on the state of the housing purchase sector.

• 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 Reserve Bank appears willing to cut interest rates further, “if needed”. And with policymakers acknowledging that wages growth had “stalled”, “employment growth would moderate”, “spare capacity remained in the labour market” and tax cuts “had yet to lift spending noticeably” it appears that the August jobs numbers – released on Thursday – could be the next catalyst for another rate cut, should the unemployment rate increase materially.

• That said, policymakers may continue to patiently wait for the desired stabilisation in home prices and tax relief to lift household consumption. In fact, the Commonwealth Bank’s July Household Spending Intentions measures – released today – suggests that, “the inflow of tax refunds into CBA accounts reveals a sharp lift in both the total value of those refunds and the average size of a refund. Over the July/August period the value of inflows was about 40 per cent above ‘normal’ levels. The refunds are not surprising. But the rate of inflow suggests that many households have moved early to secure their rebates. The boost to household spending power is larger and coming through sooner than originally expected.”

• Governor Philip Lowe’s speech “An Economic Update” in Armidale next Tuesday should provide additional clues on the likelihood of additional monetary policy easing. In today’s minutes the Board mentioned that “financial market pricing continued to imply that the cash rate was expected to be lowered by another 25 basis points by November, with a further cut expected in the early part of 2020”.

• The Commonwealth Bank Group economists expect a rate cut in November and a follow up rate cut in February 2020.

Ryan Felsman, Senior Economist, CommSec