Australia’s post-budget blues should disappear

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Australia’s post-budget blues should disappear

July 7, 2014 / By Leigh Warner

The mood of Australian consumers has been out of step with broader economic indicators over recent times. Through much of 2013, the consumer sentiment index was well above a neutral level (of 100), despite the fact that GDP growth slipped below trend and the labour market was softening.

More recently the opposite case has prevailed. That is, GDP growth has been surprisingly strong over the past two quarters (rising to 3.5% in 1Q14), the labour market has stabilised and other economic indicators have improved. Yet consumer sentiment has fallen to its lowest level in three years.

The initial steady slide in the sentiment index, from 110.3 in November 2013 to 99.7% in April 2014, no doubt reflected the lagged impact of the softening labour market and rising job insecurity. Nevertheless, employment grew by a solid 0.6% over the three months to May 2014 and unemployment fell to 5.8% after peaking at 6.0% in February.

The significantly weaker consumer sentiment in May (92.9) and June (93.2) was heavily influenced by a contractionary Federal Government budget. The conservative Australian government in its first budget proposed wide-ranging expenditure cuts, plus a ‘debt levy’ on high income earners, aimed at getting the budget to surplus over the next few years and reducing the Federal debt level it inherited. Almost 60% of respondents to the May sentiment survey felt the budget would have a negative impact on their personal finances.

Anecdotally, this fall in sentiment has been reflected in preliminary retail sales numbers in some major retail portfolios from May onwards. So the big question is whether this is just a temporary case of ‘post-budget blues’; or is it something long lasting?

We believe it will prove relatively temporary. Firstly, it should be noted that the size of the post-budget fall in confidence is not unusual. The 6.8% fall in the index in May compares to a 7% decline in May 2013, which was not as large a change in fiscal policy direction. There have also been many examples of similar sized declines in the index following the delivery of previous budgets. It is also not unusual for sentiment to be seasonal and lower through the winter months.

Importantly, business confidence has been much more resilient to the budget and was stable at positive levels in May. The business community is generally much more supportive of the fiscal consolidation and the strategy should prove supportive of private sector investment and hiring if the recovery in the real domestic economy evident in 1Q14 continues.

From a financial position, Australian households are in a healthy position. Households have conservatively saved and paid down debt over recent years, while both house and equity price growth has built household balance sheets and net wealth back up to record levels. So if business confidence can be maintained and, improved hiring boosts job security, then consumer confidence should bounce back to positive levels in the second half of the year.