Since the Federal Budget and the associated crash in consumer sentiment, which has the Westpac monthly measure down 6.6% and the ANZ weekly measure down 11% since the end of April, there has been much debate about the outlook for the domestic Australian economy and the quarters ahead.
Last week the RBA board minutes made it clear that Australia’s central bankers were already less certain about the growth outlook in the months ahead. In their weekly outlooks, released Friday, both the ANZ and Bank of America Merrill Lynch (BAML) economic teams joined this chorus of uncertainty.
BAML chief economist Saul Eslake wrote:
We reaffirm our expectation that a marked recovery in the consumer sector this year is unlikely and growth is forecast to slow from here. The Federal budget has taken away from household incomes and sapped sentiment and this has exacerbated an already challenging environment. Household disposable income growth is expected to be weak through the course of the year due to soft employment and wages growth. And in an environment of elevated household leverage, a preference for debt management and savings will also persist with consumers remaining prudent.
This fits neatly with RBA staffer research released last week which showed the exact propensity to save during uncertainty that Eslake highlights.
Felicity Emmett, senior economist for the ANZ, sees a similar derailment of growth momentum:
There are early signs that the transition away from mining investment is slowly occurring, with housing and consumer spending picking up and non-mining investment tentatively recovering. But some new downside risks have emerged. Most worrying has been the sharp fall in consumer confidence over recent weeks which appears to be related to the 2014-15 Commonwealth Budget savings measures which largely targeted households (Figure 1). Confidence has since seen a small bounce but remains sharply down from mid April levels. We will be watching this indicator closely to see where confidence eventually settles. This development poses a downside risk, especially to our consumption forecasts but our core scenario is a period of moderate growth, with the emerging strength in the non-mining sectors of the economy expected to partly offset the drag from mining investment.
The next update on consumer confidence comes tomorrow at 9.30am – we’ll be watching.