Australian Markets Weekly

A striking feature in recent times has been the divergence between the confidence of businesses and consumers.


Gloomy households: No income growth since 2008

A striking feature in recent times has been the divergence between the confidence of businesses and consumers. Business confidence is near four year highs, consumer confidence near four year lows, and the gap between the two has rarely been wider – this week we get updates on both these measures.

Looking at households, we expect there are several reasons why they are so downbeat. Chief amongst these is that the unemployment rate near 6% is at its highest point in a decade meanwhile for those who do have work wages are growing at their slowest pace in nearly two decades.

The fragility of the consumer was evident in NAB’s Q3 Consumer Anxiety Index released several weeks ago. Consumers were most anxious about Government policy, the cost of living, and the ability to fund their retirement. They were least anxious about their job security and their health. In response, consumers were cutting back on discretionary expenditure as they are being forced to spend more on essentials.

A good question is how can real incomes per person be falling when real GDP has been growing near 3% in recent years and is likely to continue to do so ahead? Several reasons. First, growth in aggregate real GDP has been boosted a great deal by the sharp growth in the population – Australia’s population grew 1.7% in 2013. Second, while we are seeing good growth in the “volumes” of GDP, particularly as some of the new mining capacity has been coming on stream, we are receiving lower prices for this output due to falling commodity prices.

As a nation, we’re working harder for less income.

Less income is also hurting the Commonwealth Budget, with Treasurer Hockey signalling last week that falling commodity prices will make it difficult for them to achieve their Budget target for a deficit of $29.8bn in 2014/15 – some adjustments are likely at the mid-year fiscal update.

The current situation of softness in incomes, profits, and tax receipts is a world away from the mid 2000s when rising commodity prices saw income, profits, and tax receipts all rising. A result then was huge budget surpluses and tax cuts for all.

The turnaround for the nation’s income will come either when commodity prices start rising (unlikely anytime soon) or firms in non-resource sector start to do better. In this respect, tomorrow’s NAB September Business Survey is the best and most up to date guide we have. As we have been all year, we are keenly watching for whether better business confidence is translating into improved profitability, employment, and capital expenditure plans.

Australian dollar update

A volatile month for AUD as until a week ago it had been in virtual free-fall since early Sep. Last week saw consolidation and we are opening below 87 cents today. Where to from here? Several weeks ago in their Global FX Strategist publication our FX Strategy team said that AUD/USD was likely to consolidate within an 85-90 cent range through year-end before falling further in 2015 – as they have been forecasting for some time. An excellent call so far. They note that while rising fx volatility is negative for AUD/USD, when you take account of other key factors like commodity prices and interest rates their fair value model valuation is now saying AUD should be 0.90, down from 0.9450 at end of August. Down, but not a capitulation.

Week ahead

Key data to be NAB’s Business Survey tomorrow and the Westpac/MI consumer confidence survey Wednesday. The property market is a hot topic, with the RBA/APRA concerned about domestic investors and some politicians concerned about illegal foreign purchases. Wednesday’s NAB Quarterly residential property survey will be worth watching.