Australia slows further – Consumer Sentiment, more weak data.

Readers know we have had a jaundice view of the economic outlook at the moment on the back of Households struggling to lift their debt burden and the generational nature of where much of this burden lies. So we simply can’t understate the importance of the triumvirate of weak data that we have seen in Australia over the last week . Employment lower and looking soft, NAB Business survey weak and deteriorating and now, this morning, another soft result from the Westpac – Melbourne Institute Consumer Sentiment survey.

Sentiment fell 2.6% in June from May and the index is now at its lowest level in a couple of years. But check out the trends in Conditions, Expectations and Confidence. in an economy such as ours with 4.9% unemployment these are terrible numbers and speak to the correctness of our working hypothesis that it is debt and the weight of debt and the burden of trying to pay it back which is weighing on households and their concerns for their future.

This is not a good thing for economic activity and we think it is likely to endure for a little while more. As readers know we believe that the savings rate is not a cyclical uptick but a structural necessity and as such the pool of available cash to be spent has reduced at a time when there is no desire to borrow money. This is reducing demand in the economy and feeding back through the economy.  

Households continue to remain concerned about their finances over the coming year which is very interesting in so far that we have mapped this against the petrol price as our usual indicator and they are more concerned (purple line inverted – the rise is actually bad) than this simple indicator would suggest.

So there may be some hope that this indicator will turn.

Australian households are de-risking and this has important implications for activity in the economy and attitudes to debt and investments.

The attitudes of respondents to the wisest place for savings are consistent with the concerns about their finances which are apparent in the main survey. Consumer caution dominates savings decisions in this survey.

There has been another significant shift in preferences towards low risk investments. The proportion of respondents who nominated bank deposits as the wisest form of savings increased from 27.1% in March to 32% in June. Since 1979 this proportion has only been exceeded in December 2008 and March 2009. The proportion of respondents nominating “pay down debt” as the wisest place for savings rose from 22.6 to 23.9 – exceeded only in September 2009 and March 2010 since 1997.

In contrast, the proportion of respondents nominating equities as the wisest place fell from 12.2% in March to 8.4% in June – the lowest proportion since the early 1990’s recession (excluding the GFC period in 2008–09), while “real estate” did not fare much better falling from 16.3% in March to 14.6% in June, down from 21.7% a year ago and the lowest proportion in the history of the series back to 1974 (excluding the GFC).

SO for the economy and the RBA the key point to note is that this savings rate remains structural as we have argued before and that it implies a lower spend and thus less activity in the economy until Households are more comfortable with their debt burden. So in a sense it is a drought we are going through, a drought that won’t last forever but a drought nonetheless.

We aren’t going to get too bearish now that the data is clearly supporting our view of where the economy is at but we must be wary of further deterioration. As we said this morning, the RBA is on hold for many months – perhaps the whole of 2011

greg@lighthousesecurities.com.au

www.twitter.com/gregorymckenna

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial adviser we are happy to help and if you are an adviser and would like to join our network we are also happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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