Consumer sentiment might become the government’s real budget crisis
Glenn Dyer and Bernard Keane|
May 21, 2014 12:30PM |EMAIL|PRINT
Consumer sentiment has responded negatively to the budget, but it remains to be seen if that translate into real economic consequences, Glenn Dyer and Bernard Keane write.
With a big fall in this morning’s Westpac-Melbourne Institute consumer sentiment index, that’s two pieces of evidence that consumer confidence has taken a big hit in the federal budget process.
Two weeks ago we saw the first evidence that the surge in retail sales that marked the beginning of the year had faded, with March sales data showing just a rise of just 0.1% in seasonally-adjusted terms. That period coincided with a stepping-up of the government’s pre-budget rhetoric of fiscal rigour and budget crisis.
Yesterday the ANZ-Roy Morgan Consumer Confidence index fell over 3% and today the Westpac-Melbourne Institute index fell over 7%, continuing its fall since the start of the year.
Consumer sentiment indices are tricky beasts — analysts are already warning that the real issue is whether these falls are sustained, or consumers shrug off the budget blues (which happened last year). Moreover, there is poor evidence that anything other than big drops in confidence translate into reduced retail sales. So we’ll need to await the April and May retail sales figures to see if any of this has translated into a further impact on real-world economic activity.
This won’t be an academic issue: it’s occurring in the context of real questions about how strong economic growth will be over the next 18 months.
“The latest data received on the domestic economy had evolved much as expected, with further indications that growth had picked up a little over the past two quarters. This had been driven by very strong exports as well as an increase in the growth of consumption and dwelling investment. However, the Board noted that overall growth in coming quarters was likely to be below trend given expected slower growth in exports, the decline in mining investment and the planned fiscal consolidation.”
Trend growth for the economy is around 3% to 3.25%, so at the annual current rate of around 2.8% up to the end of December, the economy is operating at below trend.
Now, thanks to a combination of slowing investment, especially in resources, cuts to government spending, lower volume growth in iron ore and coal exports (along with weaker prices) and weakening household consumption, the economy could be left dependent on housing for support in coming months, which is unlikely to be enough to maintain the current pace of activity.
And the RBA seems to now be taking a slightly more pessimistic line on employment growth. While it doesn’t forecast actual unemployment rates, it does examine the labour market in depth. It also thinks that, like the economy, the labour market will slow from its recent pick-up:
“While a range of indicators suggested that conditions in the labour market had improved in recent months, the demand for labour remained subdued and was likely to remain so for some time. This had led to lower wage growth, which in turn had seen inflation decline for non-tradable items whose prices were more sensitive to labour costs.”
There was another low wage price index figure released this morning by the Australian Bureau of Statistics to back that up. And the biggest impact on growth will come from the slowdown in the pace of growth in export volumes, especially of iron ore and coal. The RBA expects that the “pace of export growth is unlikely to be sustained”. That harks back to the bank’s comment in its most recent monetary policy statement that:
”.. further slowing in Chinese demand for steel would provide a downside risk to iron ore and coking coal prices, and hence the terms of trade. It could also lead to the closure of some higher-cost Australian coal producers and the cancellation of a number of coal investment projects.”
The trick for the government is to try and stop the fall in consumer sentiment translating into actual falls in consumption in coming months, at a time when the RBA is concerned that other solidly performing parts of the economy — exports, consumption, especially households, and the labour market — are expected to turndown in coming months. If it can’t, the government could get a budget and debt crisis entirely of its own making.