Consumers and businesses lacking confidence – growth may be even more sub-par

Yesterday’s ANZ-Roy Morgan Consumer Confidence figures show a slump in consumer sentiment, possibly caused by last week’s Federal Budget (see MacroBusiness’s story The epic crash in consumer confidence). The ANZ-Roy Morgan media release notes:

ANZ-Roy Morgan Consumer Confidence fell a further 3.2% to 100.4 in the week ending 18 May, after the 2014-15 Commonwealth Budget was handed down. Consumer confidence began weakening noticeably four weeks ago when some significant policies were leaked ahead of the Federal Budget’s release and is down a sharp 14% since then; the sharpest decline over a four week period since the series became weekly in October 2008.

This means both consumers and businesses are worried about the state of the economy, as we know from the CCIQ-Pulse survey that business confidence has deteriorated both in Queensland and nationally (see Pulse survey points to downturn in business confidence).

This deterioration in consumer and business confidence could just be an over-reaction to the Federal Budget and I don’t think there’s any point worrying too much about it yet. Consumer confidence is still above the depths it reached during the financial crisis in 2008-09, and is far above the level experienced in the early nineties recession. I’d wait a month or two and see whether consumer and business confidence bounce strongly back as consumers and businesses realise the Budget really won’t kill the economy.

Also, I’d note that consumer confidence appears pretty volatile and would only have a weak correlation with economic activity. Consumer confidence will certainly fluctuate a lot more than actual consumer spending will, because a large part of consumer spending is on items such as basic groceries that will be consumed almost regardless of consumer confidence.

International evidence appears to support the view that consumer confidence is not a great indicator of future activity. A 1996 OECD Working Paper Confidence indicators and their relationship to changes in economic activity concluded:

…consumer confidence indicators are much less useful than business confidence indicators for economic analysis due to their much looser relationship with output movements.

That said, there is some Australian evidence that consumer confidence significantly affects the housing sector, particularly house prices and sales volumes (see MacroBusiness’s story: RP Data: Confidence and house prices). This is somewhat concerning given that the RBA and Treasury are ultimately hoping a strong rebound in housing construction will offset the decline in mining investment and weak public demand (i.e. government spending) growth. If consumers become reluctant to purchase new dwellings or to renovate, then housing construction may not be the economic saviour it is expected to be.

Overall, while I think there’s no point being too pessimistic yet, the consumer confidence figures suggest the Treasury and RBA are right to expect below trend (i.e. below 3%) growth, and there are significant risks on the downside.

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