Thursday, July 09, 2009

Up, up and away!!!

We're losing the glooms

Australian consumers have smothered thoughts of recession as the International Monetary Fund has sharply revised up its forecasts, staking its reputation on a stronger than expected global recovery next year.

The IMF expects global growth of 2.5 per cent in 2010, a sharp upgrade on its forecast of 1.9 per cent in April.

China will grow by 7.5 per cent this year and 8.5 next year, both upgrades of 1 percentage point on its April forecast.

Even Japan is to grow far more strongly than expected, rebounding 1.7 per cent next year, up from 0.5 per cent...

The IMF expects the economies of Europe and the United States to remain weak.

The Fund credits "public intervention," with the improved outlook, but notes that "the global recession is not over, and the recovery is expected to be slow."

At home Australian shoppers have effectively declared "recession" over producing by far the biggest jump in consumer confidence in the 34-year history of the Westpac-Melbourne Institute measure.

In the space of two months the index has soared 23 per cent to the point where optimists now clearly outnumber pessimists in each of the forward-looking questions the institute asks about the future.

There are 2 per cent more optimists than pessimists when asked about economic conditions over the next 12 months, 22 per cent more optimists when asked about conditions over the next 5 years, 24 per cent more optimists when asked whether now is a major time to buy a major household item, and and 17 per cent more optimists when asked about family finances in the year ahead.

"Clearly we are dealing with much larger forces than the ones that typically drive
confidence," said Westpac chief economist Bill Evans who confessed that he was astounded by the results. "The stand out force must be the huge financial handouts introduced to counter the global financial crisis."

In an extraordinary endorsement Mr Evans said the success of the Rudd government's government’s stimulus package in boosting confidence would be "a lesson to other governments including the United States."

"The key is not the direct impact of increasing spending capacity, those two big handouts only represent 2 per cent of GDP. The key is to restore confidence, and the government's approach seems to have been more successful than either tax cuts or direct spending."

The confidence index has jumped from 88 to 109 since the May budget, where a level of 100 indicates that pessimists and optimists are evenly balanced.

The measure sees confidence higher than at any time since the very early days of the financial crisis in December 2007 and a full 38 per cent higher than a year aog.

Importantly optimists now outnumber pessimists in every income group, every occupational group, and in every category of home ownership.

Only when it comes to voting intention is there a clear difference in consumer confidence, with pessimists slightly outweighing optimists among Coalition voters with an index number of 99.2. The confidence measure among Labor voters exceeds 118.

Separately released figures show the number of new housing loans climbing a further 2.2 per cent in May to a 16-month high.

First home-buyers accounted for a record 29 per cent of new home loans according to the Australian Bureau of Statistics, with lending for construction up 8 per cent in the the month and 55 per cent over six months.

Published in today's SMH and Age


Consuemr Sentiment July 2009pdf

Westpac Chief Economist, Bill Evans, commented, "This is unquestionably a stunning
result. My personal view had been that given that last month we saw the second largest
increase in the Index since we started measuring the Index in 1974 any rise in July would
have been a great result. The news on the variables that traditionally impact the Index had
generally been downbeat. Despite this, sentiment has posted another strong gain with the
Index now printing an increase of 23.2% over the last 2 months – the largest 2 month
increase in the Index since the survey began in 1975. And it is the largest increase by a
substantial margin. The second largest 2 month increase was 18.8% in March 1992 when
households were finally convinced that the Australian economy was coming out of

“This is now the highest level of the Index since December 2007. It is 38.5% above its
level a year ago and at 109.4 optimists decisively out-number pessimists for the first time
since December 2007.

“This rise is despite no boost from the traditional drivers of confidence – petrol prices
actually increased by 3.6%; the Reserve Bank left rates on hold in June despite its
maintaining its easing bias; we even saw one bank modestly raising mortgage rates
despite no rate change from the Reserve Bank; the equity market rally has stalled since
the last survey registering a modest fall of 3.6%; and the rise in the Australian dollar has
been arrested. International news has been mixed. China's recovery has gathered pace
but it has become apparent that market optimism about an early recovery in the major
economies has been misplaced with global sharemarkets down by 3.7% since the last

“Last month we indicated that a key explanation for the near record jump in the Index was
the relief that households would have felt when reading that Australia had dodged a
recession with the release of the March quarter national accounts. This is likely to have
been a supporting reason behind the July result – with notable rises in sentiment towards
the economic outlook. However, we suspect there have been other factors at work as well.

“Clearly we are dealing with much larger forces than the ones that typically drive
confidence. The stand out force must be the huge financial handouts introduced by the
Government to counter the global financial crisis. Note that the handouts came in two
tranches. The first tranche of $8.4bn was paid mainly to pensioners and carers in
December and the second of $12.7bn has been paid to low /medium income earners over
the March/May period. After Sentiment and spending failed to respond to the first tranche
there was some criticism that the payments had been "wasted". In hindsight it appears that
this first tranche may have been too narrowly based and that those receiving the payments
were initially cautious given the avalanche of disturbing information associated with the
global financial crisis. No such criticism can be levelled at the second tranche. It has now
been almost fully disbursed and has resulted in an instant boost to retail sales and
supported this surge in confidence.

“The unexpected resilience of the employment figures has also played a role. Households
whose exposure to the sharemarket had been limited had expected that the major impact
of the global financial crisis on their welfare would have been through the jobs market.

However, over the last two months the unemployment rate has remained steady. It
appears that firms which only a year ago were nominating a shortage of quality labour as
the major constraint on their businesses are now hoarding labour. The lead indicators are
suggesting that firms have sharply curtailed plans to employ new workers but the ongoing
switch from full time to part time highlights firms' efforts to retain workers. Workers are
feeling more secure in their jobs. As of June, the Westpac-Melbourne Institute measure of
job security1 has improved by 12% since its low in February, although it is still 20% lower
than a year ago. We will release the latest update of this index tomorrow. The Consumer
Sentiment Index is now at its highest level since December 2007 when the unemployment
rate was 4.3% compared with the current reading of 5.7%.

“The success which the government’s stimulus package has achieved in boosting
confidence will be a lesson to other governments including the US which have taken
different approaches in their stimulus packages. The key is not the direct impact of
increasing spending capacity - even these two huge handouts still only represent 2% of
GDP. The key is to restore confidence and this policy approach as the first stage of a
comprehensive program seems to have been more successful than tax cuts or direct

“The lift in Confidence appears to have spread to the housing market. In May we added a
special question to the Survey asking households about their expectations for house
prices. In May, only 32% of respondents expected house prices to rise over the next 12
months. In the July survey that proportion has increased to 52%. And the rise has not
been due to over exuberant First Home Buyers. Respondents in the 35-54 age bracket
have increased their confidence levels from 28% to 53%.

“Risks still remain. The handouts have now been curtailed. The second stage of the
government's stimulus package - the $14.7bn spending over 2009/10 mainly directed at
schools is unlikely to have a similar impact on confidence. Meanwhile the unemployment
rate is set to rise further (we expect it to reach 7.5% by year's end). Even if there are
limited job reductions the lack of new hiring will mean the natural increase in the workforce
will not be absorbed and the unemployment rate will rise. We still expect, despite an
improving outlook for consumer spending, that second quarter GDP will print negative,
reviving recessionary concerns. Evidence from the last recession points to confidence
levels taking a solid hit once the unemployment rate starts to rise quickly.

“Four of the five components of the Index increased. In particular respondents were
positive about the economic outlook. "Expected economic conditions over the next 12
months" increased by 19.6%; "Expected economic conditions over the next 5 years"
increased by 15.7%. Assessments of their own finances were more subdued. "Family
finances over the next 12 months" increased by 3%; "Family finances compared to a year
ago" fell by 0.9%; "Whether now is a good time to buy major household items" increased
by 9.5%. Note that this latter component actually fell last month by 1.6% despite the 12.7%
rise in the overall Index. Research shows this component is a particularly reliable lead
indicator of overall spending so its strong rise is a very encouraging point for retailers.

“Yesterday we saw the latest Statement from the Governor following the Reserve Bank's
Board meeting in July. While maintaining the general sentiment, "some scope for further
easing of monetary policy" the rhetoric in the Statement was substantially more up beat
than in June. This print for the Index will encourage even more optimism from the Bank.
Clearly it will be some months before a case can possibly be made to deliver on the easing
bias. In these volatile times the situation can change rapidly with the labour market and the
global economy being the most likely candidates. However we must say that the
probability of the Bank acting on its bias has diminished markedly.”, Mr. Evans said.