Recession – not our problem


It’s party time, apparently.

Looking at this week’s extraordinary rise in consumer confidence would make you think we didn’t have a care in the world, and all this recession nonsense is somewhere over there.

Definitely not our problem.

Even if the Westpac-Melbourne Institute survey was taken this coming weekend, rather than the one just gone, there is little to suggest the upbeat mood would be any different, given the run of data.

Unless of course you are on the minimum wage, in the wake of the Australian Fair Pay Commission’s decision to award a big fat zero in the latest pay round.

The jobless rate did rise to a six-year high of 5.8 per cent.

But in the bigger scheme of things, it is relatively subdued compared to previous economic downturns, and when you consider unemployment in the United States and Britain is chugging towards double figures.

The consumer sentiment index jumped another 9.3 per cent in July to its highest level since December 2007, and combined with an even bigger leap in June, it is the biggest two-monthly rise ever.

At 23.2 per cent, this two-monthly increase significantly beats the previous record of 18.2 per cent set in March 1992 when consumers rightly felt that the last recession was over.

Such strength came at a time when the traditional drivers of sentiment were all pointing the other way.

Petrol prices have risen 3.6 per cent in the past month, the Reserve Bank of Australia (RBA) left the cash rate unchanged – as it did again this week – the biggest home lender raised its lending rates, and the share market’s rebound stalled.

So, according to Westpac, it must be that consumers have – rightly or wrongly – convinced themselves that a recession has been avoided.

The federal government’s stimulus measures have obviously numbed people’s recession fears.

“If you got the $900 tax bonus and the $21,000 housing grant, you would think that money was growing on trees,” Nomura Australia chief economist Stephen Roberts told AAP.

That said, Mr Roberts thought it odd that, given the strong rise in sentiment in the survey’s economic outlook questions, the assessment of respondents’ own family finances received the weakest vote.

This grew just three per cent, and when compared to a year ago, declined 0.9 per cent.

But on expected economic conditions over the next 12 months, the reading surged 19.6 per cent and over the next five years by 15.7 per cent.

Still, armed with their cash handouts, consumers have been spending at record levels at the shops, and the government’s more generous first time home owners grant is fuelling demand for houses.

This week’s housing finance data for May showed home loan commitments grew for an eighth straight month, coinciding with the introduction of the government’s increased grant back in October.

First time buyers made up nearly a third of loans granted in May, also another record.

The increased grant – which pays $14,000 for established homes and $21,000 for new properties – formed part of the government’s first stimulus package, which also included $8.4 billion in cash handouts to pensioners and carers.

Releasing the sentiment index this weak, Westpac chief economist Bill Evans said there was some criticism that these first cash payments had been “wasted”, being too narrowly focused at a time of disturbing news on the global financial crisis.

However, the second round package, including $12.7 billion in tax bonuses and welfare payments, has proved to be a different story.

“No such criticism can be levelled at the second tranche,” Mr Evans said.

“It has now been almost fully disbursed and has resulted in an instant boost to retail sales and supported this surge in confidence.”

The question is whether such buoyancy will continue when the “cash splash” has dried up and unemployment continues to rise, even if it is at a slower pace than the rest of the world.

The government is sticking with its jobless forecast of 8.25 per cent by June next year.

Westpac is also expecting the June quarter gross domestic product to show a negative, which would quickly revive fears of a recession.

Still, RBA governor Glenn Stevens was reasonably upbeat in his statement this week after the central bank’s monthly board meeting left the cash rate unchanged at a 49-year low of 3.0 per cent for a third consecutive month.

He said the global economy is stabilising and downside risks to the outlook have diminished – sentiments shared by the International Monetary Fund in its latest economic outlook updated also released this week.

Also, economic conditions in Australia have so far not been as weak as the central bank expected a few months ago.

He also said monetary policy has been eased significantly and its impact is still feeding through the system.

That said, he more or less retained the last paragraph of previous statements, that the outlook for inflation “allows scope for further easing in monetary policy, if needed”.

The outlook for inflation is extremely benign as last year’s intense price pressures unwind, aided by the economic slowdown.

At this stage, Nomura’s Mr Roberts has the annual consumer price index (CPI) pencilled in at just 1.3 per cent for the June quarter, well below the RBA’s two to three inflation target.

Policy-sensitive underlying inflation measures will still be above three per cent, but even they will fall below target in coming quarters, Mr Roberts said.

“It looks like the RBA will keep that last paragraph for a long time yet,” Mr Roberts said.

The June quarter CPI is released on July 22.


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