Business & Finance

Consumer Sentiment in V-shaped Recovery

Source: Commonwealth Securities - June 13th, 2001

Consumer sentiment is the first indicator to post a 'V shaped' recovery in 2001. The removal of newspaper references to 'recession' or 'plunging Australian dollar' has produced concrete benefits in terms of more positive consumers. Improved consumer sentiment may not lead to higher retail sales but less negativity certainly removes a barrier to increased spending.

Consumer sentiment may have bounced back but there are no guarantees that it can hold at the higher levels. Profit downgrades by major companies, higher unemployment and fall-out from corporate failures are the new gloom factors.

The reading of consumer sentiment extends the golden period of economic releases. Over the past week, the gamut of data releases and surveys has overwhelmingly pointed to firmer economic conditions. The firm reading for consumer sentiment will keep the Reserve Bank on the interest rate sidelines.

INDEX OF CONSUMER SENTIMENT - 2001

The Melbourne Institute index of consumer sentiment posted a record increase in June. The index of consumer sentiment rose by 14.8% in June to 104.8, following a 7.3% gain in May and 1.9% rise in April. The recent gains in consumer sentiment has more than negated the record 15.4% fall in consumer sentiment in March.

The survey of consumer sentiment was conducted over the weekend of 9 and 10 June. It is likely that a major influence on the results was the March quarter economic growth figures released on 6 June. The data showed stronger than expected growth in the Australian economy in the March quarter and removed the bogey of recession. The commonly accepted definition of recession is two consecutive quarters of economic contraction. The first leg of this recession scenario had been set up with the 0.6% contraction of the economy in the December quarter. But the second leg was never completed.

Each of the five components of the consumer sentiment index rose during June. The largest gain was for the question concerning economic conditions over the coming twelve months. In June, there was a 32.9% improvement in perceptions about economic conditions in the next twelve months. While consumer sentiment rose across all demographic groups, by far the most muted increase was by middle income earners (income $40-60,000), where consumer sentiment rose by 4.5%.

The monthly survey of consumers also includes a question on the 'wisest place for savings'. Over the past few years, shares and real estate have vied for the top spot. In the June survey, 26.9% of consumers felt real estate was the best place to put their money with 23.2% electing for shares. The declines in interest rates and government housing grants has tipped the balance in favour of real estate in recent months.

INFLUENCES ON CONSUMERS

Positive and negative influences constantly vie for the attention of consumers. In March, talk of recession clearly influenced consumer perceptions. The 'word' recession has extremely negative connotations with many conscious of the fact that unemployment rose from around 6% to 11% in the recession of the late 1980s and early 1990s.

The ComSec Gloom Gauge records the number of references to the word 'recession' in 19 key Australian newspapers and magazines. In March 2001, there were 859 references to 'recession'. Talk of recession coincided with news of the first quarterly contraction of the economy in more than 9 years. The index of consumer sentiment also posted a record 15.4% decline in March.

The ComSec Gloom Gauge has improved over the past two months. In May there were 327 mentions of the word 'recession' in the daily press. We would expect that the Gloom Gauge will improve further over June.

The other key negative influence in recent months has been the decline of the Australian dollar. The Aussie dollar fell to a record low against the US dollar in early April, thus negating some of the positive effect flowing from the half percent rate cut on 4 April.

Recovery of the Australian dollar from lows in recent weeks has removed the currency from the headlines. With the Aussie dollar off the front page, more positive news such as record levels for the sharemarket and stronger economic growth, has exerted influence on consumer perceptions.

AUSTRALIAN SHAREMARKET HOLDING FIRM

Despite a slew of profit downgrades in the past week, the Australian sharemarket remains a global outperformer. The Australian sharemarket stands just over 1% away from record highs. It is worth considering that the broad US sharemarket, represented by the S&P 500 index, stands 17.8% off record levels. In terms of other sharemarkets, the Swiss sharemarket is 12% below all-time highs with the UK sharemarket down 16.3% and German Dax down 24.9% from record levels.

Profit downgrades and subsequent weakness in share prices involves some decision-making for longer-term investors. For some companies, lower share prices will provide buying opportunities, provided there is confidence in the position, strategy and management of the company over the medium-term. For other companies, profit downgrades may expose fundamental weaknesses and thus raise questions about the medium-term investment potential.

Given the sharp slowdown of the Australian economy, the relative absence of significant profit downgrades highlights the health of Corporate Australia.

AUSTRALIAN DOLLAR

The continued good run of economic data has given the Aussie dollar another shot at US53 cents. The US53 cent barrier has proved formidable over the past four months, and this time will be no different. Stronger domestic economic data and expectation of widening interest rate differential with the US will continue to underpin the Aussie dollar. However, fund managers are not giving up their infatuation with US investments and commodity prices remain flat. On balance the Aussie is right to have aspirations for the US53 cent level, but upward progress will remain a grind.

The US52.88 cent level represents the 200 day moving average. If the Aussie breaks this level, then US53 cents appears a formality. A failure to break US52.88 cents would mean the Aussie capitulating to US52.5 cents, leaving US53 cents as a level to be tested in the future.

- Craig James, ComSec Chief Economist