Australia | Feb 11 2009
By Andrew Nelson
Consumer sentiment fell by 4.6% in February despite the extra 100bp rate cut and another $42 billion from the Australian government’s newest stimulus plan announced earlier in the month. By all accounts, this is not good news and that is a very big understatement.
February’s fall in consumer confidence follows yesterday’s surprisingly weak business confidence result, which showed business confidence in Australia fell to new lows in January.
All up, the read is now sitting 7.0% below the level of confidence following the first rate cut in this cycle and is now at the lowest level since the last recession. It is becoming clear that consumers are preparing for the worst. Not helping matters was the 13.3% rise in petrol prices over the last three weeks.
According to ANZ Senior Economist Katie Dean, the fall was driven by a sharp deterioration in expectations for family finances, which fell 12.2% in February. Heightened uncertainty about job prospects is also clearly affecting householders’ confidence. While the February labour market result will be released tomorrow, the January reading showed the highest level of job insecurity since the survey began in 1974.
Westpac Chief Economist Bill Evans thinks that given the continuing flow of troubling news from offshore, it is fair to assume that confidence would have been significantly lower without the rate cuts and the fiscal stimulus.
TD Securities Senior Strategist Joshua Williamson agrees, but thinks there is a worrying trend in the consumer sentiment data in that these data are showing a high degree of insensitivity to the policy measures that would normally be expected to make consumers feel better about the economy and their prospects.
ANZ’s Dean points out that the RBA and most other forecasters are relying on household consumption to hold up in 2009 and while it is becoming obvious that consumer spending will be soft, Government cash handouts and sharply lower housing variable loan rates will hopefully prevent an outright collapse. But at least modest growth in consumer spending is still required to help offset the expected sharp fall in business investment, she points out.
The 1990s experience and the 2000 mid-cycle slowdown shows that a sharper fall in consumer spending must be averted if Australia is to avoid a deep recession, says Dean and today’s fall in consumer sentiment serves to highlight the downside risks that continue to weigh on the Australian outlook.
The real question is: with sentiment this fragile, can the RBA afford to pause in March?
ANZ doesn’t think so, although Dean points out that the risks are for a smaller, not larger cut. Tomorrow’s labour market result is key, says Dean, who expects a fall of 21k.
Westpac’s Evans points out that at least the lower rates have stimulated further interest in housing. He notes the index tracking opinion about whether now is a good time to buy a house increased by 7.0% in February. This is the highest level of the Index since December 2001. However, he points out that the steady slowdown in growth in total housing credit indicates that those households currently holding a mortgage are focused on reducing debt.
With regard to the direction of interest rates over the coming month, Evans is pretty much in line with ANZ, saying the RBA will remain mindful of the need to retain flexibility to address the domestic slowdown through 2009. In his view, this means policy moves will be smaller than we have seen in recent months. Expect a cut of 0.75% in March, although Evans notes that a smaller cut of 0.5% may be adopted to conserve capacity for a longer easing cycle in 2009.
TD fully expects the RBA to fire its policy bullets in quick succession in coming months to avoid any further deterioration in this and other leading indicators of the economy. While Williamson doesn’t expect the rate to hit zero, he does think a policy rate below 2.0% looks possible.
A big part of the adjustment will come from a lower AUD and in his view, it is only a matter of time before the currency dips below US$0.60. (Some FX experts might add to this: and on its way to US$0.50).
