Press release - 14th November 2008
Lower petrol price boosts spirits. Benign wages.
Lending soars as businesses tap facilities.
Consumer sentiment; Wage Cost index; Lending finance
- Cheaper petrol prices and lower interest rates have brightened consumer spirits. The consumer sentiment index rose from 82.0 to 85.5 in November.
- Wages rose by 0.9 per cent in the September quarter and by 4.1 per cent over the year. Annual wage growth has held broadly around 4.0 per cent since the beginning of 2005.
- New lending commitments rose by 8.3 per cent in September – the biggest increase in eight months. Commercial finance rose by 14.1 per cent with personal finance up 1.5 per cent.
- New business lending has been weak in recent months because firms have been actively tapping undrawn loans. Businesses have drawn down $8 billion in previously-approved facilities loans since February. But consumers continue to shun debt with use of credit limits at 8-year lows.
What does it all mean?
- Aussie consumers are starting to realise that life isn’t so bad after all. Petrol prices are plunging, putting more spending power in people’s pockets. And interest rates are falling with further declines expected. If only the soggy US economy wasn’t dragging our sharemarket lower then consumers would be even chirpier.
- If the consumer sentiment survey was taken today rather than over the weekend, no doubt the reading would be even higher – and it all has to do with plunging petrol prices. The impact of petrol prices on consumer confidence levels is quite remarkable. Still, a saving of 30c a litre is enough to lift anyone’s spirits, translating to extra spending power of $42 a month.
- Tenants and low income earners recorded the biggest improvements in consumer sentiment in November, highlighting the influence played by falling petrol prices as opposed to changes in interest rates or share prices. Only a third of people are paying off mortgages but the price of petrol affects almost everyone.
- If the Reserve Bank had any lingering worries about the inflation outlook they would have been extinguished with the latest wage data. Wage growth is very much is ‘Goldilocks territory” – not too hot, not too cold, in fact about right. Wages are rising fast enough to give consumers extra spending power, but they aren’t rising to the extent that businesses are forced to lift prices.
- The lack of business lending in recent months is largely a mirage. Businesses have actually been actively drawing down on the record level of facilities put in place, utilising $8 billion of loans over the past seven months. And usage of credit limits is at 12-year highs.
- While businesses are borrowing, consumers aren’t keen with usage of credit limits falling to 8-year lows.
What do the figures show?
- The index of consumer sentiment rose by 3.5 points (4.3 per cent) in November, rising from 82.0 to 85.5. The sentiment index is now well off the 17 year lows of 79 hit in July. Still, the consumer sentiment index is down 22.6 per cent on a year earlier.
- The current conditions index rose by 3.5 per cent, while the expectations index lifted by 4.7 per cent.
- Only two of the five components of the index rose in November. The estimate of family finances compared with a year ago fell by 7.8 per cent while the estimate of family finances over the next year fell by 0.1 per cent. The estimate of economic conditions over the next year eased by 1.8 per cent. But expectations of economic conditions over the next five years rose by 15.7 per cent. And the estimate of whether it was a good time to buy major household items lifted by 15.8 per cent in October.
- The wage price index rose by 0.9 per cent in the September quarter, with annual wage remaining at 4.1 per cent. The June quarter reading was revised down from 1.2 per cent to 1.1 per cent. Annual wage growth has held broadly around 4.0 per cent since the beginning of 2005.
- Private sector wages rose by 0.9 per cent in the September quarter. Annual growth rate eased from 4.3 per cent to 4.2 per cent. Public sector wages rose by 0.9 per cent in the quarter with the annual growth rate easing from 3.8 per cent to 3.7 per cent.
- Including bonuses, ordinary hourly rates of pay rose by 1.3 per cent in the September quarter and by 4.2 per cent over the year.
- Industries with fastest annual wage growth: Mining, (up 6.3 per cent); Property & business services (up 5.0 per cent) and Construction and Wholesale Trade (both up 4.6 per cent);
- Industries with slowest annual wage growth: Accommodation, cafes & restaurants (up 2.3 per cent), Cultural & recreational services (up 3.2 per cent), Health & community services (up 3.2 per cent).
- Annual wage growth across States & Territories: NSW, 3.7 per cent; Victoria, 4.2 per cent; Queensland, 4.2 per cent; South Australia, 3.9 per cent; Western Australia, 5.1 per cent; Tasmania, 4.0 per cent; Northern Territory, 4.3 per cent; and ACT, 3.8 per cent.
- Lending Finance: Total new lending commitments (housing, personal, commercial and lease finance) rose by 8.3 per cent in September – the biggest increase in eight months. Lending commitments had fallen for seven straight months and are still 19.0 per cent down on a year ago.
- Commercial finance rose by 14.1 per cent and personal lending rose by 1.5 per cent. But housing lending fell by 1.9 per cent and lease finance fell by 4.0 per cent.
- Within commercial commitments, fixed lending rose by 20.2 per cent while revolving credit gained 5.4 per cent. Within personal commitments, revolving credit rose 3.4 per cent but fixed lending eased 0.8 per cent.
- Businesses have been actively drawing down on previous loan commitments. The level of undrawn commercial loans has fallen from a peak of $58.9 billion in February to $50.9 billion in September. Usage of commercial revolving credit limit hit 60.6 per cent in September – a 12 year high.
- Within housing finance, loans for the construction or purchase of dwellings fell by 1.9 per cent but alterations and additions rose by 4.2 per cent – the biggest gain in eight months.
- Personal credit limits grew by 7.4 per cent in the year to September but debt only rose by 4.1 per cent. Only 43.8 per cent of credit limits were used in September – an eight-year low.
What is the importance of the economic data?
- Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. Roy Morgan conducts a survey of consumer confidence. Both surveys are aggregated from responses to questions on the current and likely future state of family finances, current and likely future state of the economy and whether it is a good time to buy a major household item. Confident consumers may be more inclined to spend, especially on major items.
- The Labour Price Index has been compiled since September quarter 1997 and measures quarterly changes in wage and salary costs for employees. The index is based on a representative sample of employees, and includes measures of non-wage costs including superannuation, payroll tax, public holiday and workers compensation. The Labour Price Index is useful in measuring wage pressures in the economy. While strong growth in wages would boost domestic spending, it could also serve to lift employer costs and prices and add to economy-wide inflationary pressures. The labour price index is a measure of hourly pay rates (excluding bonuses).
- Lending Finance is released monthly by the Bureau of Statistics and contains figures on new housing, personal, commercial and lease finance commitments. The importance of the data lies in what it reveals about the appropriateness of interest rate settings, confidence and spending levels in the economy.
What are the implications for interest rates and investors?
- The latest economic data is encouraging. Consumers are feeling chirpier because petrol prices and interest rates are coming down. Wage growth is decidedly benign. And the reason why businesses haven’t been borrowing is now clear – they are drawing down on previously committed facilities.
- Once businesses have utilised all their existing lending options they will be again be ringing their bank managers. But companies have over $50 billion of facilities already in place.
- Consumers still aren’t keen to borrow, further dispelling the myth that people are up to their eyeballs in debt.
- The Reserve Bank still has much work to do in cutting rates as it needs to ensure that there is plenty of stimulus in place to shield the economy from the gloom abroad. CommSec expects rates to be cut another 1 percentage point to 4.25 per cent over the next three months.
Source Craig James, Chief Equities Economist, CommSec
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