[CommSec Research]Super-cautious consumers

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Super-cautious consumers

Consumer sentiment

¾ Aussie consumers remain super cautious. The Westpac/Melbourne Institute index of consumer confidence rose by just 1.2 per cent in April after easing by 2.4 per cent in March.

¾ Happiest consumers are men; rich people; Generation Y; people who live in regional areas; Labor voters; and those in white-collar jobs.

What does it all mean?

· Aussie consumers remain super-cautious, and it’s not hard to work out why. Most people still harbour doubts that the global financial crisis is truly over. Then add in the Brisbane floods, north Queensland cyclone, Japanese earthquake, Christchurch earthquake, jitters in the Middle East, fears about a carbon tax and rising petrol prices and it is clear that it is hard work to be an optimist. And that worry list is far from complete. Small business operators are worried about a lift in the minimum wage and the Greens taking control of the Senate in July.

· Still, it’s not all bad news. The job market is healthy, the Reserve Bank looks set to stay on the interest rate sidelines, the global economy appears to be on the mend, the Aussie dollar is high and the sharemarket has been rising over the past fortnight.

· The bottom line is that people are weighing up a lot of influences – some of them good, others bad. It will take a period of stability – especially on interest rates – for Aussie consumers to gain confidence and start spending again.

· Interestingly there is a big gap in confidence between city dwellers and their country cousins. In regional areas confidence lifted 12.2 per cent in April while sentiment in metropolitan areas slumped by 4.5 per cent. Certainly rural conditions are the best they have been for years. Dams are full, paddocks are green, sub-soil moisture is high and global agricultural prices are hovering at historically-high levels. In cities, however, people are still worried about rate hikes as well as the flattening of home prices.

· Presumably if you are a rich male who lives in the bush or a regional centre and is a Labor voter who has a white collar job, you are pretty happy with your lot at present.

· CommSec doesn’t expect the Reserve Bank to touch official interest rates until at least August. And if the more balanced economic conditions continue, hopefully it will mean that the Reserve Bank stays on the sidelines for longer.

· The bottom-line is that retailers will have to continue discounting goods to attract interest from consumers. And the risk is that more consumers will troll through foreign websites to buy goods, spurred on by a high Australian dollar.

What do the figures show?

Consumer sentiment

· The Westpac/Melbourne Institute index of consumer sentiment rose by 1.2 per cent in April to a reading of 105.3 after falling by 2.4 per cent in March. The consumer sentiment index is now down 9.3 per cent on a year ago.

· The 12-month rolling average of the consumer sentiment index hit a 14-month low of 109.6 in April.

· The current conditions index rose by 2.2 per cent, while the expectations index rose by 0.5 per cent.

· Four of the five components of the index rose in April:

Ø The estimate of family finances compared with a year ago rose by 0.1 per cent;

Ø The estimate of family finances over the next year rose by 1.4 per cent;

Ø Economic conditions over the next 12 months was higher by 3.4 per cent;

Ø The measure of economic conditions over the next five years fell by 3.3 per cent;

Ø The measure on whether it was a good time to buy a major household item rose by 3.5 per cent in April after falling by 4.8 per cent in March.

· Men (index reading of 112.5) are far more optimistic than women (98.3). Young people (18-25 years, index reading 124.6) are far more optimistic than older people (over 45 years; index reading of 99.2).

· Regional areas (index reading 108.0) are more optimistic than city dwellers (102.8) – a big turnaround over the past month.

What is the importance of the economic data?

· Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.

What are the implications for interest rates and investors?

· Yet another reason for the Reserve Bank to do nothing on official interest rates. Consumers are cautious and aren’t spending, buffeting small and medium-sized businesses.

· The bad news for retailers is that consumers are cautious and price-conscious; putting downward pressure on selling prices and margins. The good news is that consumer fundamentals remain healthy – namely the strong job market, higher real wages and stable housing affordability.