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Mixed Signals And Responses: The Current State Of The Australian Economy

The RBA’s decision to leave the official cash rate at 2.5 % marks the 10th month of no change. Despite this long easing stance the labour market is subdued and consumer sentiment is nearing recessionary levels. Put together it is little wonder retail is going down the drain. With all this consumer gloom you’d think business would be in the doldrums. Its not and nor is mortgage activity. How did this confused state come into being?

I’m not feeling so good

Almost universally: the Federal Budget was not well received. There is no better way to measure this than consumer sentiment, which took a serious dive with its announcement. Westpac reported that sentiment was at one of the highest levels of dissatisfaction for the survey since it began in the mid 1970s: an unenviable feat for the Government. While the indicator improved over May it remains at near recessionary levels.

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Unemployment and Participation rates

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The other concerning factors for households, which stretches back long before the announcement of the budget, is that the participation rate has been in slow decline (shown above) and the growth in wages has also noticeably declined, as shown below. None of these indicators send a strong message to consumers to lift their spirits and spend. In fact together they reinforce negative expectations.

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Cyclical discounting

With all of this decline, it is little wonder the retail sector has had a tough run. Though, as the graph below shows, this should not be overplayed. There is a pattern to spending in Australia. High levels of spending happen unsurprisingly around the holiday period, a steep decline immediately afterward, a reasonable recovery follows, with some short peaks and troughs on the way back to Christmas. There was a slight pickup overall in May, as shown below although history would indicate we should not hold our breath.

Percentage change (%) Total retail turnover

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Broken down by sector the latest data shows department stores as the only sector not able to improve turnover on the previous month. Helping to explain all those discounts.

Percentage retail turnover by sector (%)

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Give me, give me more

The housing market continues to act like a phoenix. The Veda Quarterly Consumer Credit Demand Index reached its highest level since 2008 during the March quarter. As the graph below shows this is supported by significant growth in mortgage demand: 10.8% over the year to March and a slight pickup in credit card demand. This is easily explained of course: investors are driving credit demand, not people in fear of losing their jobs.

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Feeling better than before

Seemingly in rejection of the broader gloomy outlook business confidence rested at its long run average in the latest survey by NAB. This is surprising as firms are still discounting persistently soft levels of business conditions as well as the negative consumer sentiment surrounding the budget.

 

Business confidence

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Like any aggregated indicator, the key is to look at its makeup. NAB reports that the greatest confidence booster is coming from the construction sector. This is to be expected with the rise in residential building commencements, as shown below.

Total number of dwelling units – Total Sectors

 

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Mining is the only industry with negative confidence levels. You only have to look at iron prices to understand why, with the price even dipping below $US90 a tonne in mid June. The RBA characteristically underplayed the decline in their notes on monetary policy saying that ‘in historical terms (prices) remain high, but some of those important to Australia have declined.’ But we already knew this.

 

Iron Ore Price Changes

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Demanding more

If we take mining out of the equation, which saw a 9% decline over March quarter, demand for business loans has consistently increased since 2011. Over the March quarter, business loan applications grew by 4.2%. The well-reported activity in the property market has driven a surge in commercial mortgage applications. This has not been mirrored in trade credit or asset finance, which have all but leveled out.

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Shake, shake, shake

The RBA is desperately trying to rejuvenate the economy. The government is trying to stimulate through road building and not much else. Consumers are nervous about jobs and aren’t spending. At the same time house prices continue to rise (though may plateau soon). Businesses on the other hand have been little affected by the budget and are starting to respond to the reduction in interest rates. It all sounds a little lopsided. The question is whether the confidence of business and the determination of the government will lead to substantial changes in consumer outlook. Time will tell.

 

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