Wednesday, February 11, 2009

Is consumer confidence responding?

It has collapsed regardless.

We are feeling both better off and less confident.

Westpac's Bill Evans:

"This is a truly unique result. The solid 4.6% fall comes in the wake of a 100 bp rate cut from the Reserve bank which has been fully passed on to mortgage rates by the banks. It also follows the announcement of $42bn fiscal stimulus package from the Commonwealth government which includes a $12.7bn package of cash payments to Australian taxpayers. Partly offsetting these positives would have been the 13.3% rise in petrol prices over the last three weeks.

Despite this record largesse consumer confidence tumbled to a level which is 7.0% below the level of confidence following the first rate cut in this cycle. Since then mortgage rates have tumbled by 375 points yet Consumer Confidence has failed to respond....

Of course we can justify the rate cuts and fiscal packages on the
basis of how far confidence would have tumbled without these
aggressive policies.

Given the profoundly disturbing news from offshore it is fair to
assume Confidence would have been significantly lower without the
rate cuts and the fiscal stimulus.

Within the Index we have some components which assess a
households’ assessments of their current position and some
components which measure their expectations. As a result we have
constructed a Current Conditions Index and an Expectations Index.

Usually both Indexes move in the same direction. That has not been
the case in the last few months.

The Current Conditions Index actually increased by 3.9% in February
while the Expectations Index tumbled by 10.5%. That followed a
similar pattern last month when the Expectations Index fell by 5.2%
and the Current Conditions Index rose by 2.4%. Over the last three
months the Expectations Index has fallen 13.3% and the Current
Conditions Index has risen by 24.7%. We have never seen, in the 35
year history of the Survey, such a three month divergence in Current
Conditions and Expectations. This development in the Index indicates
that while consumers recognise the improvements in current
conditions resulting directly from the aggressive policy stimuluses
they are unusually fearful of the future.

This represents a serious challenge for policy. Logically it points to
consumers saving any excess income. We saw some evidence of
this from the retail sales data for December where we assess that
of the $8.7bn stimulus package only around $700 m was used to
boost retail spending. Our current estimates are that the household
savings rate will increase from around 1.5% in 2007 to around 8%
in 2009. A rebalancing in the economy towards increasing official
sector spending to compensate for rising household savings is the
appropriate policy response to the current serious global recession.

This drive to sharply increase savings is resulting from recognition
from households that their balance sheets are too vulnerable to
possible shocks associated with falling house prices and rising
unemployment. In 2008 house prices in Australia fell by 3.3% - the
first annual fall since 1996."