Consumer Confidence Down
Consumer sentiment has fallen by 0.6% in June despite the Reserve Bank of Australia’s (RBA) rate cut earlier in the month, according to Westpac.
Survey interviews conducted by Westpac-Melbourne Institute indicate that the consumer sentiment index dropped from 101.3 in May to 100.7 in June. Both of these figures were below the long term average of 101.5.
Many Australians were reluctant to spend despite the falling interest rate, blaming the minuscule wage growth, falling house prices, and record household debt. It was clear that the RBA’s decision had failed to boost consumer confidence.
Jonathan Brown, a spokesperson for the consumer website Choice said that “many Australians are feeling financially stretched by the impact of rising health insurance costs,” and found “three in five Australians are worried about their level of disposable income and the rising cost of health.”
Attempt to boost consumer confidence
Earlier in June, the RBA decided to reduce the official cash rate by 25 basis points, due to a lack of growth in international trade and “increased uncertainty” in the global market. The weak growth and uncertainty had left Australians more inclined to save. The Bank recognised that this uncertainty flowed into household consumption as a result of a “protracted period of low income growth and declining housing prices.”
The RBA’s decision was driven by unfavourable unemployment and stalling inflation. The bank believed a reduction in the cash rate will “assist with faster progress in reducing unemployment” and “towards the inflation target.” Ultimately, the RBA expected the growth in household disposable income to improve which would support consumption.
The rate cut, which was passed on to consumers by some of the commercial banks in full and some in part, attempted to encourage Australians to spend more. Of the big four banks, CBA and NAB passed on the rate cut in full to their mortgage loan rates. Westpac and ANZ, however, only reduced their mortgage loan rates by 20 and 18 basis points respectively.
The outcomes appeared to have worked as intended, reflected in a 1.8% rise to 116.9 in the “Time to buy a dwelling” index. “House price expectations” index grew by 22.7% to 109.7 according to Westpac. However, the house prices index itself remained well below the average of 126.4.
Consumer sentiment was disappointing in other segments. The official interest rate reduction did not encourage consumers to spend more on household goods, which was reflected in the “Time to buy a major household item” index. The index dipped 0.2% to 115.5 in June, far below its average of 127.3. Current economic conditions suggests that consumer spending is likely to remain weak in the short term.
Unemployment expectations index recorded a 5.1% increase, wiping out all of the previous month’s decline. Hence, most Australians expect unemployment to rise in the year ahead. The volatility in the unemployment expectations index suggests that labour market conditions may be shifting. However, according to the responses from past rate cuts, there was no tendency for confidence to shift favourably immediately following the cut.
Retailers’ sales frenzy
Ahead of the end of financial year sales, falling consumer confidence has alerted the Australian retailers, with many opting to offer discounts in advance. Finder.com, a price comparison site that offers discount deals from leading brands, has indicated that retailers have already gone into a “sales frenzy”. Mr Brown said that “retailers are trying to fill the year with lots of different sales events,” but in the end, it was about “shoring up their finances.”
The sports retailer Rebel was offering 50% off shoes and 30% off all clothing. The Iconic, a fashion website, was advertising a 60% discount on 35,000 different items. David Jones was slashing prices on homewares and bedding of up to 50%. In the car dealing segment, Holden dealers were offering savings of up to $5,000, including three years’ worth of free scheduled servicing.
Mia Steiber, a shopping expert, indicated that Australians did not like to shop if items were not on sale. She said, “We as shoppers have been programmed to know that if something isn’t on sale, it will be soon enough – particularly in times of economic uncertainty.”
According to the ABS, data showed that retail sales fell 0.1% in April, spending on household goods fell by 0.9%, and other retailing goods dropped by 1.2%. The falling figures indicated a big slowdown in the retail industry and a lack of confidence among consumers.
Will the economy improve?
The RBA mentioned that the Board will continue to “monitor developments” closely and “adjust monetary policy to support sustainable growth in the economy”. Many had already predicted another rate cut later in the year and with the current market sentiment, it is more likely for the cash rate to be around 1% by the end of the year.
It is too early to determine the effect of the rate cut on the economy. However, what is absolute is that if the Australians continue to shy away from consumer spending, another rate cut is unlikely to improve the stalling Australian economy.
By Jack Lee
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