Recession-free economy fails to lift mood

Colin Brinsden, AAP Economics Correspondent
(Australian Associated Press)


The nation may be enjoying an unprecedented run of economic expansion but Australians are seemingly unimpressed.

Two gauges of consumer sentiment released on Wednesday showed confidence has either stalled or gone backwards, a particular worry for retailers.

Their release came as global investment bank JP Morgan revised its interest rate outlook, predicting 50 basis points worth of cuts to one per cent in the Reserve Bank’s cash rate in the first six months of 2018.

Sally Auld, the bank’s chief economist in Sydney, believes the overall setting of financial conditions does not appear loose enough to generate growth in domestic demand consistent with achieving the RBA’s 2-3 per cent inflation target.

She concedes the most common pushback against this view is the Reserve Bank not wanting to encourage a lift in house prices with an easing of interest rates.

But Ms Auld believes the central bank will have to acknowledge the impact of weaker growth outcomes in the first six months of 2017 on its own GDP and inflation forecasts.

The cash rate has been at a record low of 1.5 per cent since August.

The monthly Westpac-Melbourne Institute confidence index fell a further 1.8 per cent in June, indicating a growing number of pessimists compared to optimists.

The index has been in a downward trend for around a year.

“The disappointing March quarter GDP update clearly has a hand in the weak result,”‘ Westpac senior economist Matthew Hassan said.

While economic growth grew 0.3 per cent in the March quarter, defying the expectations of some economists who had predicted a negative result, it left the annual rate at 1.7 per cent and its weakest pace since the 2008-2009 global financial crisis.

However, despite this softness, the economy has not suffered a recession since 1991.

Mr Hassan linked continued weakness in household incomes – which have barely outpaced inflation in the past year – to a lack of confidence.

“Recent increases in mortgage interest rates and electricity costs have likely added to pressures,” he said.

In a separate report, Deloitte Access Economics partner David Rumbens says while the wealth effect from surging house prices has provided support to household spending in recent years, it has left many people with “eye-watering” mortgages.

“Servicing these higher debts will eat into retail spending capacity going forward,” he says.

The Westpac survey also found economic conditions, budget and taxation as the most recalled news items among respondents and both were viewed as more unfavourable than in March when previously asked.

The weekly ANZ-Roy Morgan consumer confidence index held steady, stalling after three straight weeks of increases, again blamed on the GDP result.


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