Consumer confidence

Successive rounds of interest rate cuts have a lot to do with how consumers are feeling. The Reserve Bank of Australia (RBA) has been cutting interest rates since November 2011 to help keep the  economy on an even keel as Europe plunged into crisis and demand for our resources fell as well as weakness across the non-mining economy. At three per cent, the official interest rate is now at its  lowest level since 2009, during the global financial crisis.

The change in consumer sentiment is evidenced by the Melbourne Institute/Westpac Consumer  confidence Index, which has risen in 2013 compared to late 2012 with the readings for February and March showing a pick-up in consumer confidence, albeit having retreated somewhat in April. In fact the index has been climbing in fits and starts for the past 12 months, and is now at higher levels than it had been for the whole of 2012. Consumers may be feeling more confident, but that does not mean they are loosening their purse strings (see graph 1). While there has been moderate growth in consumption, RBA Governor Glenn Stevens believes a return to “the very strong growth of some years ago” is unlikely.

An RBA report found that net wealth in households has been rising recently due to the “recovery in housing and other asset markets as well as continued higher saving and borrowing restraint”. Many households still prefer to repay existing debt rather than take on new debt, according to the report. “Despite the unemployment rate having drifted up a bit over the past year, housing loan arrears and other aggregate measures of financial stress in the household sector remain low,” the report said.

Housing moves up a rung

The muted recovery in the housing market is another positive sign for the economy. House prices, auction clearance rates and the numbers of auctions are the key indicators to watch, along with residential construction and housing finance. House prices in Sydney, Perth and Darwin all rose during 2012, according to the RP Data-Rismark Home Value Index. The story was a little different in other cities, though, with Melbourne, Brisbane and Adelaide all recording a drop in prices. For property investors, rental growth was better for 2012 across Australia with rents for houses up by 3.1 per cent and units up by 2.6 per cent. Signs that the housing market is improving include the level of discounting by vendors and the average time it takes to sell, according to RP Data-Rismark’s Tim Lawless.

“It currently takes an average of 50 days to sell a capital city home, and initial listing prices are typically being discounted by 6.3 per cent in order to make sale,” Lawless said. “At the same time in 2011, it took an average of 60 days to sell a home and they were typically being discounted by 7.2 per cent.” Auction clearance rates also remained largely above 50 per cent each week of 2012 while they were consistently below 50 per cent during the previous year and have continued to rise in the early months of 2013, especially in Sydney and Melbourne.

Investing a little more

While an improved economy, a drop in term deposit rates and strong share market returns are usually the conditions that encourage a return to shares, it seems to be too early to tell if these conditions will sway investors. Tentative signs of increased confidence among investors are evident, according to the Colonial First State Equity Preference Index, published in collaboration with the University of Western Australia’s Business School. Under 35 year olds and 50 to 59 year olds are feeling a little more confident but this may be a temporary shift in attitude, according to the latest report of the Index.

Business remains in the doldrums

While consumers and investors may be feeling a little more upbeat, the same cannot be said for business. The NAB Business Confidence Index is low compared with its highs of recent years, as businesses struggle against the difficulties caused by the rising Australian dollar and the muted spending patterns of consumers (see graph 2). A drop in mining growth in recent months is also influencing business.

Where does this leave us? Generally we’re in a better, stronger position than last year and the signs of recovery are good, but it may be a slow road.