Aussie Consumers Remain Upbeat, But Not For Long

Aussie Consumers Remain Upbeat, But Not For Much Longer

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Consumer confidence in Australia, as measured by the Westpac-Melbourne Institute (WMI), fell in April as expected, but only modestly. The confidence index fell just 1.0% to 116.1, remaining elevated near a three year high and indicating that optimists continue to easily outnumber pessimists. We had anticipated a larger fall of 3.0% in the WMI index in April in the wake of the RBA’s decision to hike the cash rate a further 25bp last week.

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Indeed, consumer confidence has held up much better than anticipated in recent months. It seems that the RBA’s assertive tightening (the official cash rate has been hiked five times over the last six meetings) has yet to bite. In fact, the WMI reported that confidence among those that own their houses fell just 1% in April, but among those that have a mortgage, confidence actually rose 02%. This may owe to the fact that the majority of mortgage holders maintained their monthly repayments over the course of the RBA’s easing cycle, so that mortgage rate increases have yet to reach the point where rate hikes have a major impact on confidence. This dynamic, though, is nearing an end.

As highlighted by the WMI, in the last tightening cycle, confidence only started to take a hit when standard variable mortgage rates exceeded 7.3%. When the standard variable mortgage rate rose from 7.05% to 7.3% in March 2005 following a 25bp hike from the RBA, consumer confidence tumbled 15.5%. Following the ensuing seven rate hikes, the average monthly fall in confidence was 8.5%. On this evidence, and with standard variable mortgage rates currently around 7.15% and rising, sensitivity to rate hikes probably will increase significantly going forward.

Only two of the five major index components fell in April, family finances a year ago (-0.6%) and family finances a year ahead (-8.0%); the latter was the largest fall in nearly two years. Sentiment toward the economy one and five years ahead rose 1.3% and 0.7%, respectively, and sentiment toward buying major household items rose 1.5%. Aside form attitudes to family finances, we think sentiment will rise in the remaining components going forward given the positive outlook for the labour market. Workers’ hours that have been cut over the last year will be reinstated throughout 2010, wage growth will accelerate, and employment gains will be sizeable in 2H as the investment boom gets underway. The positive impact on consumer sentiment of the anticipated tightening in the labour market will, to some extent, offset the negative impact of rising market interest rates.

We believe the next rate hike could come as early as the next Board meeting on May 4. Indeed, the commentary that accompanied last week’s rate hike was more upbeat. We consider that 4.5% is the near term “target” for the RBA, but continue to look for a cash rate 5% by the end of the year.

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