One of the major findings in the latest study is that the average real weekly household disposable income went backwards over the past two years. The drop wasn’t huge – with income down from $859 a week to $848 a week. But it was the first fall in 14 years, thus helping to explain why consumers have been paring back spending.
The evidence that we have had to date suggests that consumers weren’t being forced to reduce spending, rather it was more a case of choice. That is, consumers were worried about a host of factors such as the global economy and decided the safest route was to squirrel more savings away. But the household income survey suggests that – on average – people have less income available for consumption and saving, requiring them to be more conservative with their funds.
The survey shows that there were a greater proportion of people getting income from government pensions or allowances over the past two years with less people saying that their main source of income was a wage or salary.
Clearly economic circumstances will vary with each household income survey. In the two year period to June 2010, unemployment was modestly higher although wealth was near record levels. But it’s worth noting that both these factors haven’t changed greatly over the past year.
Another key result – and throwing further light on the spending/savings question is that a record proportion of Australians are now paying off a home loan. There has clearly been a major change over the past six to seven years. Back in 2002-03 more Australians owned their homes outright than those who rented or were paying off their home purchase. The way the current trends are going it is possible in the next five years that there will be more people renting than owning their home outright.
Clearly the fact that more people are paying off home loans further explains why people are more inclined to save rather than spend any extra cash they receive.
And a third key finding is that Australian households are indeed getting bigger for the first time since records were first compiled a century ago. If more people are occupying a dwelling, then there is less need to build new homes or apartments and thus goes some way in explaining while the home building market is failing to fire despite apparently tight rental markets across the country.
It is that time of the month when the key surveys of businesses and consumers do the rounds. The NAB business survey is released on Tuesday with the Westpac/Melbourne Institute consumer confidence slated for Wednesday.
In terms of the business survey, it is clear that both business confidence and business conditions have softened over the past four months with fresh worries surfacing about US and European economies. The jitters abroad also have given consumers even more reasons to leave cash in their pockets, placing further downside pressures on the domestic economy. There seems little way out of this “funk” in the near-term, short of major new initiatives in the US and Europe to kick-start their economies.
In July the NAB business conditions index stood at -1.3 with business confidence at +2.0 with both readings well short of decade averages of around 6-8 points.
The Westpac/Melbourne Institute consumer sentiment index for September is published on Wednesday. And after falling for four straight months to two year lows, the index may have found a base in the latest month. At least that is the expectation based on the weekly measure of consumer sentiment published by Roy Morgan which hit a three-month high in the latest week. Consumers may be starting to realise that it’s not all gloom and doom down under, especially with banks cutting fixed-term lending rates to the best levels in two years.
Of the other indicators, credit and debit card lending statistics are released on Monday together with lending finance and the monthly trade figures. Another trade surplus near $2 billion is expected while, the July “cards” data should further confirm the longer-term trend – away from credit cards in favour of people using their own cash to make purchases. And lending finance will be closely watched for signs that people are becoming more willing to take on debt.
On Tuesday the Bureau of Statistics (ABS) is planning to release further information on building approvals and detailed data on household spending. On Wednesday the ABS releases the first paper of seasonal adjustment of the consumer price index while dwelling commencements data is also issued.
On Thursday, August data on new car sales is released together with detailed industry employment data. Based on the VFACTS data, we expect that car sales rose by 3.5% – further recovery from the supply problems of earlier in the year.
In the US, there is a bevy of “top shelf” indicators to be released over the coming week. And while figures on inflation are on the agenda, they are likely to be shunned in favour of activity indicators. The key issue at present is whether the US is heading towards a “double-dip recession”.
The week kicks off data on import and export prices on Tuesday together with the monthly Federal Budget result. And on Wednesday retail sales data is released together with figures on business inflation (producer prices). Economists tip a modest – but still positive – 0.2% increase in retail sales. And the core measure of producer prices (excludes food and energy) may have edged 0.1% higher after a 0.4% lift in July.
On Thursday, data on consumer prices are slated for release alongside the current account and industrial production figures. The regional Empire State and Philadelphia Fed indexes are also scheduled. Economists tip a 0.2% lift in production and 0.2% increase in core consumer prices.
And on Friday the September consumer sentiment index is scheduled together with July capital flows data. Consumers are unlikely to cheer up until jobs become more plentiful and the sharemarket lifts.
One thing has become abundantly clear over the past few months. When there is turmoil, the Australian sharemarket will slavishly follow the US. But in times of calm, the Aussie market will go its own way. In the first three months of the year the R-squared measure – or measure of the relationship or correlation – between the Dow Jones and Australian All Ordinaries was 0.28, where a result near 1.0 would suggest the two indexes were moving in tandem. But since July the correlation ratio between the two indexes has held at 0.90, suggesting a very tight relationship.
It’s worth reflecting on earlier periods as well. In 2005 when economies and markets were reasonably settled, the correlation ratio between US and Australian markets was just 0.20. But the R-squared was an impressively precise 0.96 in 2008 and 0.92 in 2009. The moral to the story is that Australian “fundamentals” will always take a back seat when there are times of turmoil abroad.
We may bemoan the fact that Australian shares religiously follow US and European trends despite significant differences in economic and financial environments. But one way we benefit in Australia from the global weakness is in terms of lending rates. The woes abroad are dragging down Australian fixed-term interest rates, providing substantial benefits for businesses looking to renegotiate or take on new debt. In February 2009 Australian swap rates fell to the lowest levels recorded with the three-year swap rate hitting 3.38%. Remarkably three-year rates are currently less than one percentage point away from those lows.
Craig James is chief economist at CommSec.
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