Australians worried about their money are paying down debt instead of spending

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Pessimists continue to outnumber optimists in Australia, but not by much.

According to the latest Westpac-MI Consumer Sentiment report for March, the survey’s headline index increased by 0.1% to 99.7, leaving it fractionally below the 100 level that indicates that there are an equal number of both optimists and pessimists.

Anything below 100 indicates there are more pessimists right now, as has been the case for the past four months.

While hardly an earth-shattering outcome for financial markets, it was not the headline index but the internals of the report that were of most interest in March.

They were pretty downbeat, particularly towards current finances and the investment outlook.

Westpac said that weaker readings for family finances offset improved sentiment towards the economic outlook in the latest survey.

The table below from Westpac looks at the performance of the survey’s internal subindices, comparing the results to February as well as the levels of a year ago.

Source: Westpac

Of note, particularly when it comes to the outlook for household spending levels, the subindex measuring family finances compared to a year ago tumbled 5.3%, taking its decline over the past year to over 10%.

“This component is now at its lowest level since June 2014 when respondents were shaken by the May Budget announcement,” said Bill Evans, chief economist at Westpac, adding that “currently respondents are particularly concerned about their own finances”.

“News from the December quarter national accounts that wage incomes had fallen by 0.5% is indicative of the source of these concerns. That news, of course, complemented other recent reports that wages growth had fallen to a record low of 1.9%,” he said.

Not the best outcome for the outlook for household spending, the largest component in GDP and an area that helped to boost Australian economic growth in the final three months of 2016.

With pessimism towards finances so high, it does cast doubt on whether that boost can be sustained in the coming quarters.

Reflective of that dour view, there were also signs of increased investor risk aversion, says Evans.

“Every quarter we also ask respondents for their preference for their savings. This can provide us with any evidence that consumers are becoming more or less risk averse,” he said.

“There was a notable shift in March with the proportion nominating ‘pay down debt’ jumping from 20.5% in December to 25.7%, and the proportion favouring real estate dropping to just 11.6%, a record low since we first started asking this question back in 1974.

“The moves indicate a clear increase in risk aversion.”

Source: Westpac

Given high levels of investor caution and concerns surrounding family finances, Evans says the RBA is unlikely to lift rates this year or next.

“As we saw in today’s report, households are concerned about their finances, largely because of weak income growth. This concern is unlikely to fade in 2018 appropriately constraining household spending and discouraging investment,” he says.

“That is no environment for higher rates.”

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