http://www.melbourneinstitute.com/research/macro/PressReleaseCSI20081112.pdf
Cheers,
Shadow.
Consumer Sentiment battles back
The Westpac–Melbourne Institute Index of Consumer Sentiment rose by 4.3% in November from 82.0 in October to 85.5 in November. Westpac’s Chief Economist, Bill Evans, commented, "This is a welcome result. There has been great uncertainty as to how consumers would react to the barrage of news over the last month. The survey in October preceded the Reserve Bank's surprise decision to reduce its cash rate by a surprisingly large 1%. Of course that good news was followed by the announcement by the Commonwealth government of its $10.4bn stimulus package including cash payments of $8.7bn and a doubling of the first home owners grant for established homes and a tripling of the grant for new construction.
This good news was followed last week by the Reserve Bank's second surprise reduction in its cash rate of a bold 0.75%. Furthermore the banks effectively matched the RBA's 1% cut in the cash rate with an effective 0.98% cut in the prime variable mortgage rate in two tranches. The banks have responded to the second 0.75% cut by the Reserve Bank with cuts ranging between 0.58% and 0.65%. Essentially since the last survey the prime variable mortgage rate has been reduced by 1.56% – 1.63%. “On the other hand households have been unsettled by the ongoing disturbances in financial markets associated with the global credit crisis. All institutions regulated by APRA were given government guarantees which affected confidence in those institutions that did not receive the guarantees and restrictions were placed on the access of investors to their savings. Extensive media coverage of these events would have unnerved households.
The value of savings in direct shares and superannuation was battered with the share price index falling by around 14%. News of house price declines and the prospect of a global recession would also have weighed heavily on sentiment. The Australian dollar fell as low as US 59 cents at one stage during the month. Despite this weakness in the Australian dollar the precipitous decline in the US dollar price of oil allowed a 12.5% fall in petrol prices. “With such momentous events, little wonder that the direction of the change in the Index was so uncertain. However, we should not get too excited about this rise. Despite all the "good" news the Index is still 22.6% below last year's level and 14.5 index points below the level where optimists and pessimists are in equal numbers.
The current period represents the longest period since the recession in 1990/91 when pessimists have consistently outnumbered optimists. The current level of the Index is slightly above three other reads this year but excluding this current period is the lowest read of the Index since 1992. “Despite the sharp fall in mortgage rates, the confidence of those folks with a mortgage only increased by 2.9% whereas the confidence of tenants was up by 11.1%. Low income earners responded positively to the stimulus package. Confidence of respondents earning less than $20,000 per year surged by 14.4%. The one off payment to pensioners in the stimulus package was probably responsible for the 10.3% jump in the Index for the oldest age group in the sample – over 45's.
“The rate cuts and the increase in the First Home Owners Grant had a very positive impact on sentiment towards housing. The Index measuring whether now is a good purchase a house surged by 21%. It is now at its highest level since March 2006 and the third highest level since March 2002.
“There were some clear messages from the various components of the Index. Collapsing share markets and possible concerns with trust investments saw a 7.8% fall in respondents' assessments of their finances relative to a year ago. Furthermore, despite the rate cuts, expectations for finances over the next 12 months fell by 0.1%. There is also caution about the next 12 months. Usually when households see rate cuts they become more positive about the near term outlook for the economy. Despite these mammoth cuts, confidence about economic conditions over the next 12 months actually fell by 1.8%. It would appear that the Reserve Bank has more work to do to restore households' confidence in the near term. However respondents do recognise the benefits of lower rates and a proactive approach to fiscal policy for the medium term.
The outlook for economic conditions over the next 5 years surged by 15.7% – the biggest increase in that generally stable component since July 2000. Retailers may also glean some comfort from the 15.8% surge in opinions on whether it is a good or bad time to buy a major household item. Last month's level for that component was the lowest since the survey began and provides some comfort that the $8.7bn in payments which will be disbursed as part of the government's stimulus package may be spent rather saved. Westpac expects around 30 – 40% of the payments will be spent.
“The Reserve Bank Board next meets on December 2. Cash rates have been reduced by 2% over the last three Board meetings. We expect that the Bank is focussed on moving rates out of the ‘contractionary’ zone where the stance of policy constrains spending, into the ‘expansionary’ zone. We assess that rates are currently still in the contractionary zone.
In its latest Statement on Monetary Policy the Bank noted that despite its cash rate having fallen by 125bp's to end October the average interest rate on household loans had only fallen by 0.73%. Despite a strong response on variable mortgage rates the Bank is clearly concerned that the distortions arising from the credit crisis are blunting the impact of monetary policy. That means that rate cuts need to be deeper and rapid. With the following Board meeting not to be held until February 3 there is a decent chance that the Bank will decide to cut again by 0.75% in December.” Mr. Evans said.
Cheers,
Shadow.
