THE BIG PICTURE: The consumer confidence thaw starts… slowly

The Federal Government’s $2.3 billion household assistance package is already having an impact across the economy. Retail spending recorded a healthy 0.5% rise in May, but more importantly it was the boost in non-food spending that was even more encouraging.

Non-food spending rose by just shy of 1% in the month, taking the annual rate to a near two-year high. Electrical, footwear, liquor, newsagents, and cafes, restaurants and takeaway food retailers have done best by far with robust sales over the month.

But while the government deserves credit in providing a timely boost to spending, it is only part of a much bigger story. The Reserve Bank cut rates late last year and it has provided a boost in purchasing power for the third of Australians paying off homes. In addition, the even more substantial 0.5% rate cut in May would have also prompted consumers to part with cash, although the full impact of this cut will be better felt in coming months.

It may or may not have been its initial goal but the government’s household assistance scheme has provided businesses with a lifeline until activity levels improve. And, interestingly, the most recent data would suggest that the domestic economy is gathering some pace albeit from a low base.

House prices have started to rise, posting its biggest monthly gain in 27-months in June, lending finance data suggests businesses are more willing to borrow funds given the attractive low rate environment, and the retail story looks set to only gather traction.

The impact of the recent rate cut will only be felt in coming months. In addition, the tax cuts to low and middle income earners, as well as the expiry of the flood levy on July 1, and the government’s next tranche of stimulus – the schoolkids’ bonus – will provide further support.

In fact, household budgets are in decidedly better shape than three months ago, especially when you add the substantial slide in fuel prices. Expectations of strong sales in coming months should limit retailers from cutting further staff in the near term.

The economics all add up; structurally the economy is sound. At present, consumers are still showing a degree of caution – although it is thawing. The key will be how quickly confidence improves.

The week ahead

After last week’s plethora of “top shelf” indicators, investors will be focused on some of the second-tier indicators over the coming week. In Australia, smaller pieces of the puzzle are released. But they will be just as useful in providing a more complete picture of the domestic economy. Overseas, the focus is on the larger pieces of the puzzle, including the latest round of Chinese economic data.

On Monday, the ANZ job advertisements series is released. Job advertisements are a key leading indicator. If employers are advertising for staff they are probably witnessing a lift in sales and, more importantly, expect stronger activity to be maintained. Job ads fell for the second straight month in May dropping by 2.4% and were down 4.3% on a year ago. So the June data will be a key test of the underlying strength in the labour market.

On Tuesday, the NAB business survey is released. Business confidence is holding at nine-month lows while conditions have deteriorated to three-year low levels. It is clear that tough domestic trading conditions coupled with the downside risks to global growth and concerns about the European Union are dampening confidence and increasing caution. However there have been encouraging signs that the sizeable Reserve Bank rate cut has started to lift business sentiment when it comes to borrowing.

On Wednesday, a survey of consumer confidence is released alongside data on home loans. Aussie consumers are remaining cautious. The problem is that cagey consumers are more likely to sit on their hands and not spend. And the data on home loans is yet another test about where the economy is headed. New lending slipped by 0.2% in April and data from the Bankers Association suggests that lending rebounded by 3% in May.

And on Thursday, the June jobs report is issued. The labour market statistics have been certainly surprising over the past couple of months. In May, employment rose by almost 39,000 against expectations for a flat result. In fact, since the start of 2012, businesses have added an additional 123,000 workers.

However, given the slowdown in job advertisements and patchiness across the economy we expect that a flat jobs result for June. But jobs need to rise by around 10,000-15,000 to prevent the jobless rate rising. As a result, we expect a modest lift in unemployment from 5.1% to 5.2%. But apart from the jobs and jobless figures, the number of hours worked will also come under scrutiny.

Apart from the economic data, the Reserve Bank deputy governor Phillip Lowe will deliver two speeches; firstly in Melbourne on Wednesday to the Australian Conference of Economists, and in Sydney on Thursday for the Economist’s Bellwether Series. The speeches may provide a more in-depth view of the Reserve Bank’s thoughts on the economy.

In the US, the week kicks off with the consumer credit data released on Monday while trade figures, wholesale inventories and the minutes from the FOMC meeting are slated for Tuesday. Later in the week, import price data is issued on Thursday with producer prices and consumer confidence figures on Friday.

In terms of consumer credit, borrowings are expected to have picked up in May rising to around $8.5 billion. The May trade deficit is expected to have narrowed from -$50.1 billion to -$48.5 billion, while wholesale inventories are tipped to have risen by 0.3% in May.

The minutes of the FOMC meeting will certainly garner some attention, especially given that the US Federal Reserve opted to extend its Maturity Extension Programme (aka Operation Twist) for another six months until the end of the year. Investors would be searching for more clarity on the likelihood of another round of quantitative easing.

The inflation reporting season kicks off on Friday with the release of the producer price (business inflation) for June. The core measure of producer prices (excludes food and energy) probably rose 0.2% in June. If prices are lifting, businesses are no doubt witnessing firmer activity and they are becoming more confident.

Sharemarket, interest rates, currencies and commodities

The ongoing uncertainty surrounding the European debt crisis and slowdown in China has prompted us to revise our forecasts for the Australian sharemarket.

We were waiting on the European developments to pan out and the shift in European policy last week is certainly a step in the right direction, breaking the vicious circle between banks and sovereign governments and allowing direct bank recapitalisation. While providing a degree of stability, the significant structural European reform will take time and as such we have softened our target for domestic equities.

The US economy continues its protracted recovery and we expect Chinese authorities to ease policy in coming months to stimulate activity. At the same time, lower domestic interest rates should prompt more domestic investors to put their money to work in “riskier” assets like shares and property rather than cash.

We now expect the All Ordinaries Index to end the year around 4,450 points (ASX 200 4,400 points) and end June 2013 at 4,650 points (ASX 200 4,600 points).

Savanth Sebastian is an economist at CommSec.


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