Australian Markets Weekly: 4 September 2017

Consumer confidence – personal finances weighing.

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Overview:

  • Why consumer confidence is diverging from business confidence is a key question being asked by clients. The divergence has gained prominence given the recent strength in employment would seemingly hint that we might be closer to the turning point in the monetary policy cycle than first thought. The counter to that view remains the low wage environment and the sense that subdued consumer confidence may be telling us that the economy is softer than headline employment growth would suggest.
  • In this Weekly we explore why consumer confidence is currently subdued and whether it is likely to recover in the near term. We use three lenses: formally modelling consumer confidence to identify the main drivers; comparing consumer confidence across the states to identify any emerging trends; and finally comparing Australian consumers to the rest of the world.
  • Our modelling suggests the current subdued level of consumer confidence is due to low wages growth, an elevated unemployment rate, and asset price appreciation that is not contributing as strongly as it has done in the past (see Chart of the week). The modelling can explain around 63% of the trends in consumer confidence and importantly offers hope that as the unemployment rate starts to fall and as wages growth stabilises and picks up, consumer confidence should as well. (note a 2% point change in the annual rate of wages growth would cause a 9.6 point change in the level of consumer confidence).
  • Our state comparisons indicate there is some evidence of a two speed economy dynamic playing out. Consumer confidence is stronger in the non-mining states than in the mining states by around 5% points, though confidence has weakened in the non-mining states in recent times. Comparing Australian consumers to other countries also reveals Australian consumers are currently more worried about their own family finances, and while they are less gloomy about the outlook for the economy, they are also not as positive as consumers in other countries.
  • The weakness in the family finances component no doubt reflects subdued wages growth and relatively elevated unemployment – these factors also align with our formal modelling. Other factors at play may include higher electricity prices and rental and housing affordability issues, though these are hard to disentangle in the modelling.
  • Coming up: it’s a busy week domestically with the Q2 GDP figures Wednesday and the RBA Board Meeting Tuesday, along with four RBA speeches! Other key data points include Retail Sales and the Trade Balance Thursday. Internationally most focus will be on the ECB and whether they discuss a tapering of their Asset Purchase Program (markets do not expect an announcement at this meeting), and on the Bank of Canada which is seen by the market as likely to hike rates by the October meeting (now 100% priced). Key international data includes the US Non‑manufacturing ISM Wednesday and China’s Trade data on Friday.

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