A Westpac-Melbourne Institute survey showed consumer confidence declined sharply in June, falling by 6.9%. The index tumbled from a recent high of 102.4 points in May, to 95.3 points this month.
The news that consumer confidence is dropping should serve as a wakeup call to policy makers. This country is slowly sleepwalking into a recession.
Consumer and business confidence is down; the trade deficit is up; tax revenues are down; and national debt is up. Neither the government nor the RBA have anything in their arsenal to figure out how to get out of this mess. People will point to interest rates, but how effective is that proving to be? Just glance over this consumer confidence data if you’re looking for an answer.
Not a month ago, economists were telling anyone who’d listen that economic conditions were starting to pick up. They may have been right at the time, but their short-sightedness was in full display.
First came the rate cut in May, setting the cash rate at a record low 2%. Then we had a soft federal budget that didn’t spring too many surprises on households. These were supposed to give the entire economy a lift. And, temporarily, they did. In hindsight, it’s easy to see why consumer confidence rose by 6.4% between April and May.
That figure even prompted calls from some corners suggesting that the RBA had reached the floor of their rate cutting policy. Then some economists even suggested that the RBA could start raising rates. That optimism now looks very misplaced, doesn’t it? The gains made in May’s consumer confidence survey have now been well and truly wiped away.
That means that rate cuts are now firmly back in the frame. The only question remaining is the small matter of timing. Last month the market penned the likelihood of a rate rise by early next year at 92%. Can you really see the RBA holding out until then if consumer confidence remains so poor? No, me neither.
Five-year consumer outlook for the economy is grim
The Westpac-MI survey also revealed that long term consumer sentiment is down heavily month on month. The five-year outlook fell by a substantial 17.1% between May and June.
Obviously, these figures tell us more about the current mind frame of the Aussie consumer than anything else. People don’t give much thought to what an economy will look like in five years’ time. They think even less of their buying habits over this period. Instead, it’s easier to look at this as a guideline for consumer sentiment for the rest of this year at the most. And what consumers seem to be saying is that — this year — things are bad.
The fact that the five year outlook plummeted so badly is a clear sign that consumers have nothing left to give in 2015. What this suggests to me is that we’re closer to a recession than many people care to concede. If consumers aren’t going to spend, then why should businesses invest in projects or hire new workers? They have no reason to.
With meagre wage growth, cutbacks in business spending, and an unemployment rate that NAB believes could hit 6.4% by the end of the year, it’s easy to see why a recession is possible.
All this brings us back full circle to the issue of interest rates. A rate cut is the only measure that could give another boost to consumer confidence in the short run. It certainly won’t come as a result of fiscal policy on the government’s end. Their tax revenues are drying up, and they’re engaged in a ‘take more, give less’ strategy right now.
So we look to the RBA for an answer. It’s an answer we all know is coming. But it’s also one we all secretly realise is having less of an impact on the wider economy. And the RBA realises it too. Here’s RBA Governor Glenn Stevens’ take on it:
‘Much of the effect of monetary policy comes through spending, borrowing and saving decisions of households. [Between households, government and corporations] it is households that probably have the least scope to expand their balance sheets to drive spending.
‘That’s because they already did that a decade or more ago. Their debt burden, while being well serviced and with low arrears rates, is already high’.
Despite that, Mr Stevens admits that the RBA are still open to cutting rates again. Why? Because that’s their only recourse. There’s no other way to avoid a recession without rolling the dice on another rate cut.
But as Mr Stevens confesses, a rate cut will fail to address the fundamental issues facing the economy. Not that it will stop them from doing exactly that. Kicking the can down the road is something central bankers have become very efficient at.
The problem, as The Daily Reckoning’s Greg Canavan says, is we’ve reached the end of the road. As one of Australia’s leading investment analysts, Greg is convinced that Australia faces a recession in 2015. What seemed like scare mongering at the beginning of the year now looks like increasingly likely.
In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals why our economy finds itself in the hole it’s in. He’ll show you why debt levels have spiralled out of control — and why that means a recession is almost inevitable. But Greg also wants to show you a way to protect your wealth. He’s prepared a set of actions you can start taking right now to lessen the impact of a recession on your financial wellbeing.
To learn how to shield yourself from the imminent crash click here and download your free copy of the report today.
Contributor, The Daily Reckoning