Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Aussie consumers send slowdown signal
Summary: The RBA might be giving the economy the benefit of the doubt, but it doesn’t look like consumers and businesses are doing the same.
Yesterday’s ANZ Roy Morgan weekly consumer confidence reading highlighted that consumers are feeling a lot less confident about the outlook for economic growth and their future finances.
Today’s monthly consumer confidence index from Westpac further cemented the downturn in consumers' views on the domestic economy, with sentiment falling 4.8% month-on-month, the largest fall since 2015. The outlook for the Australian economy looking one year forward slid 6.9% m/m and sentiment towards family finances, based on both current conditions and the year ahead, also tumbled. These declines were considerably larger in both New South Wales and Victoria, which is where the steepest declines in the housing market have been felt.
Westpac Monthly Consumer Confidence:
• Consumer sentiment 98.8, -4.8% m/m
• Current conditions 101.1, -2.8% m/m
• Family finances, year ago 84.4, -5.6% m/m
• Economy 1 year ahead 95.9, -6.9% m/m
• Buy major household item 117.9, -0.6% m/m
Last week’s weak Q4 GDP report, where GDP growth slowed to 2.3% year-on-year (well below the Reserve Bank of Australia’s 3% target), brought into focus a “per capita” recession and highlighted the loss in economic growth momentum in the back half of 2018, a contributing factor behind the hit to consumer sentiment. The Q3 and Q4 2018 GDP readings now confirm that the domestic economy recorded the two weakest quarters of growth since the GFC as household spending continues to drag on growth.
Private consumption continued to slow, falling to 2.0% y/y growth in Q4 from 2.6% in Q3 and 2.9% in the first half of 2018. This weak data likely sealed the deal in bringing down consumers' current confidence and confidence in the economic outlook. The risk is that the downward momentum becomes self-perpetuating. The longer confidence is eroded amongst business and consumers, the more negative sentiment persists and the less likely an H2 rebound becomes. If economic fundamentals continue to deteriorate equity markets will be susceptible to further weakness.
ANZ Roy Morgan weekly consumer confidence:
• Consumer Confidence Index 109.5, -4.6%
• Financial Situation, year ahead 122.2, -5.4%
• Economy One Year Ahead 94.6, -7.9%
• Economy Five Years Ahead 105.4, -5.4%
Today’s monthly consumer confidence index from Westpac further cemented the downturn in consumers' views on the domestic economy, with sentiment falling 4.8% month-on-month, the largest fall since 2015. The outlook for the Australian economy looking one year forward slid 6.9% m/m and sentiment towards family finances, based on both current conditions and the year ahead, also tumbled. These declines were considerably larger in both New South Wales and Victoria, which is where the steepest declines in the housing market have been felt.
Westpac Monthly Consumer Confidence:
• Consumer sentiment 98.8, -4.8% m/m
• Current conditions 101.1, -2.8% m/m
• Family finances, year ago 84.4, -5.6% m/m
• Economy 1 year ahead 95.9, -6.9% m/m
• Buy major household item 117.9, -0.6% m/m
Last week’s weak Q4 GDP report, where GDP growth slowed to 2.3% year-on-year (well below the Reserve Bank of Australia’s 3% target), brought into focus a “per capita” recession and highlighted the loss in economic growth momentum in the back half of 2018, a contributing factor behind the hit to consumer sentiment. The Q3 and Q4 2018 GDP readings now confirm that the domestic economy recorded the two weakest quarters of growth since the GFC as household spending continues to drag on growth.
Private consumption continued to slow, falling to 2.0% y/y growth in Q4 from 2.6% in Q3 and 2.9% in the first half of 2018. This weak data likely sealed the deal in bringing down consumers' current confidence and confidence in the economic outlook. The risk is that the downward momentum becomes self-perpetuating. The longer confidence is eroded amongst business and consumers, the more negative sentiment persists and the less likely an H2 rebound becomes. If economic fundamentals continue to deteriorate equity markets will be susceptible to further weakness.
ANZ Roy Morgan weekly consumer confidence:
• Consumer Confidence Index 109.5, -4.6%
• Financial Situation, year ahead 122.2, -5.4%
• Economy One Year Ahead 94.6, -7.9%
• Economy Five Years Ahead 105.4, -5.4%
Nestled within today’s Westpac consumer confidence report is further confirmation that heavily indebted Australians are increasingly worried about the domestic outlook as consumers have become more risk-averse in terms of the best place to put new savings than they were during the financial crisis
Date showed 55% of respondents nominating safe options such as bank deposits, superannuation or paying down debt as the best place for savings, and only 9% of respondents favoured real estate, which has fallen from 28% four years ago and is now at a record low going as far back as 1974. Matthew Hassan, Senior Economist at Westpac, said “The mix is more risk-averse than at the height of the global financial crisis in 2008 and highlights the risk that a move by households to increase savings rates could further undermine consumer demand”.
Private consumption is a big driver behind the Australian economy and historically represents around 60% of GDP. This means the outlook for household spending is very important in determining the future path of the Australian economy. As we have previously highlighted, the outlook surrounding the consumer in Australia remains fragile, which will see the RBA forced into a corner where there is no option but to cut rates, despite their reluctance. The RBA is banking on employment strengthening and wage growth coming through to offset the negative wealth effect and consequent hit to consumption due to falling property prices.
In our view, the RBA is too optimistic and will need to cut the cash rate, but until there is evidence of labour market strength tapering off the RBA will be less inclined to cut rates.
The multiplier effects of house price declines on the economy are yet to be felt and as declines continue, they will intensify. The housing slowdown will feed back to the real economy through the negative wealth effect which will continue to weigh on overleveraged households’ consumption and result in weaker GDP growth. With the current savings ratio near decade lows, consumers will no longer be able to hold up spending habits as asset prices continue to fall. House prices have continued to fall throughout the first quarter of 2019, on that basis it doesn’t look like reprieve is on the horizon. Employment will not continue to hold up as confidence is eroded and growth continues to lose momentum. The labour market remains resilient, but unemployment is a lagging indicator, so the data only gives us a rear-mirror view on the health of the labour market. There are a host of leading indicators that point to a potential slowdown in hiring ahead, and a rise in unemployment.
Continued weakness in consumer confidence is another indicator, amongst many we have already highlighted, showing that policymakers at the RBA, and in the government will need to step in with a policy response using both the fiscal and monetary arrows in their stimulus quiver.
Date showed 55% of respondents nominating safe options such as bank deposits, superannuation or paying down debt as the best place for savings, and only 9% of respondents favoured real estate, which has fallen from 28% four years ago and is now at a record low going as far back as 1974. Matthew Hassan, Senior Economist at Westpac, said “The mix is more risk-averse than at the height of the global financial crisis in 2008 and highlights the risk that a move by households to increase savings rates could further undermine consumer demand”.
Private consumption is a big driver behind the Australian economy and historically represents around 60% of GDP. This means the outlook for household spending is very important in determining the future path of the Australian economy. As we have previously highlighted, the outlook surrounding the consumer in Australia remains fragile, which will see the RBA forced into a corner where there is no option but to cut rates, despite their reluctance. The RBA is banking on employment strengthening and wage growth coming through to offset the negative wealth effect and consequent hit to consumption due to falling property prices.
In our view, the RBA is too optimistic and will need to cut the cash rate, but until there is evidence of labour market strength tapering off the RBA will be less inclined to cut rates.
The multiplier effects of house price declines on the economy are yet to be felt and as declines continue, they will intensify. The housing slowdown will feed back to the real economy through the negative wealth effect which will continue to weigh on overleveraged households’ consumption and result in weaker GDP growth. With the current savings ratio near decade lows, consumers will no longer be able to hold up spending habits as asset prices continue to fall. House prices have continued to fall throughout the first quarter of 2019, on that basis it doesn’t look like reprieve is on the horizon. Employment will not continue to hold up as confidence is eroded and growth continues to lose momentum. The labour market remains resilient, but unemployment is a lagging indicator, so the data only gives us a rear-mirror view on the health of the labour market. There are a host of leading indicators that point to a potential slowdown in hiring ahead, and a rise in unemployment.
Continued weakness in consumer confidence is another indicator, amongst many we have already highlighted, showing that policymakers at the RBA, and in the government will need to step in with a policy response using both the fiscal and monetary arrows in their stimulus quiver.
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