Thursday, January 20, 2011

Suddenly we don't feel much like shopping

Yet they are talking of levy

Overall consumer confidence: down 6%

Good time to buy household item: down 4%

Family finances next 12 months: down 6%

Economic conditions next 12 months: down 16%

Economic conditions next 5 years: steady

Westpac Melbourne Institute January survey conducted January 10 - 17

The Queensland floods have knocked the suffing out of consumer confidence obliterating the usual post-Christmas bounce and pointing to fragile spending as authorities attempt to come to grips with how to manage the economy.

The proportion of Australians agreeing that "now is a good time to buy a major household item" nearly always jumps in January, often by as much as 10 per cent.

This January, for only the third time since records have been kept, the proportion fell, negating the effect of the January sales.

The Westpac Melbourne Institute consumer sentiment survey was conducted in the second week of January as the floods hit Toowoomba and Brisbane.

In Queensland the overall measure of confidence fell 6 per cent, in the rest of the nation it fell 3 per cent.

Optimism about economic conditions over the coming year slid 16 per cent... and expectations about personal finances 6 per cent.

Only when asked about economic conditions five years out was sentiment unchanged, with pessimism about the long-term continuing to somewhat outweigh optimism.

"The effects have spread beyond Queensland," said Westpac economist Bill Evans. "People are thinking about the implications of the floods for the national economy."

"Even before the floods we did not expect another interest rate rise until the second quarter of this year. Now we don't expect one until the second half."

CommSec economist Savanth Sebastian said consumers had turned conservative. "Interest rates would need to remain on hold for an extended period to tempt consumers to part with their cash."

The Reserve Bank board meets in 12 days time. It is likely to at first take a relaxed approach to the inflation that will result from the floods, believing that supporting confidence and spending is more important than containing inflation.

"A few years back the Bank looked through the inflationary spike in banana prices," said Credit Suisse consultant Sean Keane.

"What they won't be able to look through is a spike in the price of labour and the cost of materials as rebuilding efforts on the east coast compete for resources with advancing projects on the west coast."

"They are going to face an enormously difficult challenge over the second half of this year, and it is likely there will be no right answer, but a host of wrong ones. The idea of tightening policy in the face of a natural disaster of such epic proportions is not something any central bank Governor will want to do, but the lack of spare capacity in the Australian economy is likely to guarantee that Governor Stevens will be forced to do so."

ICAP Securities economist Adam Carr said spending would boom in the wake of the floods regardless of consumer confidence.

"The tragedy is enormous, but the reality is that goods need replacing and houses and infrastructure need to be rebuilt," he said. "It's January and people are not going to sit around and wait until the middle of the year to start rebuilding their lives."

Published in today's SMH and Age

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