Opinion
Confidence crash: Terrified consumers shut their wallets and fear for the future
Elizabeth Knight
Business columnistSave for the months in 2020 at the panicked height of the first COVID wave, consumer confidence is at its lowest in 31 years - where it was during the recession of the early 1990s.
We are now at the point where measuring confidence feels like a misnomer - we should replace it with a fear metric.
And the sentiment survey from ANZ Roy Morgan didn’t even capture the Reserve Bank of Australia governor Phil Lowe’s Tuesday evening forecast that inflation will peak at 7 per cent this year - a jarring moment for households that are already experiencing elevated fuel and food costs.
Consumers are walking away from spending.Credit:sydney morning herald
Confidence levels are not as low as they were in April 2020 - but this was an exceptional time during which people were faced with real concerns about the healthcare system, the economy, the collapse of businesses and employment.
The counterintuitive aspect to this alarmingly under confident consumer read is that as a group, consumers have a cash survival stockpile of $250 billion built up over the two years of COVID and the economy’s unemployment rate is at a 50-year low.
And we are not in the midst of a recession and most economists still believe we will escape one -albeit the rate of economic growth is expected to slow. In an economic sense, Australia is like a ‘prepper’ armed with supplies of cash to see us through the disaster.
But the consumer confidence surveys are telling us households’ confidence in both financial and economic conditions has significantly deteriorated. When viewed graphically - it’s fallen off a cliff.
The percentage of respondents that expect good times for the economy over the next five years has slumped to 10 per cent - in other words 90 per cent expect the economy won’t be good.
The ANZ Roy Morgan survey took place in the period following the RBA’s 50 basis point rate increase earlier this week and was similar in findings to the sentiment survey released by Westpac on Wednesday.
The size of the rate hike certainly came as a shock to most economists - the pack was looking at a 25 basis point rise and so was the public.
The bigger than expected rate rise was the RBA’s tonic to a larger and faster rise in inflation, the feature that also hugely influences consumer sentiment.
These play into another major factor that influences whether the consumer sleeps well at night - house prices. Regardless of whether people are active buyers or sellers, the value of their dwelling is very influential on their feeling of wealth and financial wellbeing.
Recent readings on house prices suggest values have already peaked and in most capital cities are already on their way down. Estimates of how far they will fall by the end of this year and into 2023 vary - but the consensus is around 15 to 20 per cent.
And then there is the sharemarket slump that we have experienced throughout the year which, over the past week, has graduated to a rout. On Wednesday the market reached a year-low.
This knocks around superannuation balances, which for those nearing retirement threatens to become a meaningful issue. For those in the earlier stages of their career, falling superannuation balances still feeds into the wealth effect.
Regardless of whether people are active buyers or sellers, the value of their dwelling is very influential on their feeling of wealth and financial wellbeing.
Capping off the fear factor is the geopolitical and economic ructions overseas. The energy crisis sparked by the end of peak-COVID and the Russian war on Ukraine have deeply unsettled consumers.
Confidence is an important economic measure because it informs consumers’ willingness to spend and household consumption is Australia’s biggest economic driver.
Surveys of confidence generally measure our willingness to buy a major household item and it’s a decent proxy for what could otherwise be seen as a consumer risk index.
Major retailers such as Wesfarmers’ owned Bunnings could feel the pain from a spending slowdown.
If we are uncertain about the future of finances we are less likely to risk spending on a big item (like a major whitegood or a TV) - choosing instead to squirrel away cash.
The ‘time to buy a major household item’ measure plunged by more than 14 per cent in a week and, according to Westpac Melbourne Institute consumer sentiment survey, the ‘time to buy a dwelling’ index has now reached a post-GFC low.
Consumer sentiment then bleeds into their willingness to buy optional items and it explains why stockbroking analysts have begun to de-rate the earnings potential of discretionary retailers including Wesfarmers (owner of Bunnings, Kmart, Target and Officeworks), JB Hi-Fi, Kogan and Harvey Norman.
In a note, analysts at Macquarie said: “The difficulty for corporate profitability will be to maintain wage growth at a rate high enough to avoid demand destruction while not eroding profitability.”
Since these comments were made by Macquarie earlier this week, the Fair Work Commission has moved to raise minimum wages by 5.2 per cent - a move that will apply pressure on companies currently or soon to be dealing with enterprise bargaining agreements not covered by the Fair Work decision.
If there is a positive to be taken from his plunging consumer sentiment index it is that the Reserve Bank’s measures to take the heat out of inflation by raising rates is already starting to gain traction.
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