Consumer confidence lower

Funds Management

by Jessica Amir

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National Australia Bank, Senior Economist, Bob Cunneen talks about the "grumpy" Australian consumer, why confidence is low and what is needed to reverse the situation.

Jason Hazell:
Hi today, I’m joined by Bob Cunneen to discuss Australia’s grumpy consumer. Welcome Bob.

Bob Cunneen: Thanks Jason.

Jason Hazell: So why is the Australian consumer grumpy?

Bob Cunneen: What we’re suggesting here is there are a number of reasons why consumer sentiment is negative, at the moment. So when we look at the Melbourne Institute’s survey, the number of pessimists outweigh the number of optimists. And that indicates that consumers are a bit gloomy, a bit grumpy. So what we’re trying to look at here is some of the reasons behind it.

Now I’ve provided three key reasons. Firstly, rising electricity and healthcare costs. So consumers are feeling a bit of a squeeze in terms of their expenses. Very subdued wages growth, again that puts a squeeze on household budgets. And the third aspect is high household debt. So, some consumers have pushed the envelope in terms of borrowing capacity.

Jason Hazell: Before we get to those three things, can we just go back to basics for a second. What do you mean by consumer confidence?

Bob Cunneen: Essentially it’s a measure of optimism versus pessimism. And what happens in these surveys is they ask the mums and dads whether they’re feeling positive about the state of the world, and the state of the Australian economy. Or whether they’re feeling negative. Now, this confidence can reflect a number of things, they can be both emotional and rational. It could be emotional in the sense of perceptions of the level of trust and alike, or they can be rational in response to recent events. So, it’s a very curious mix of behavioural, as well as logical factors in play.

Jason Hazell: And of those measures you mentioned a second ago, which of those are particularly driving the consumer sentiment at the moment?

Bob Cunneen: We don’t exactly know because we don’t get the detailed response with the survey, to say one particular factor is the driver. So hence these are suggestions, they’re not the actual, we can’t say definitively, these are the actual drivers of why consumers’ sentiment is so soft. So if we looked at say electricity and healthcare costs, we notice over the past decade they’ve been rising rapidly. So if you looked at electricity, it’s going up eight per cent per year, medical expenses are going up close to five per cent per year. So this in itself would indicate that consumers have a rational basis for feeling a little bit grumpy.

Jason Hazell: I would have thought they’d feel a little bit grumpy too about the lack of real wages growth, over the last decade or so too. Would that be right?

Bob Cunneen: That’s exactly right. Because when we look at wages growth compared to the rise in the Consumer Price Index, which is the basket of goods and services, what you can see is wages growth over the past 10 years, have only been growing at about three per cent per year. And consumer prices, goods and services, going up close to 2.5 per cent per year. So wages are barely outpacing costs in that sense. And what we’ve noticed over the past year is wages growth has come down to below two per cent, inflation is close to two per cent. So real wages, so adjusting after prices, are not increasing.

Jason Hazell: Thank you very much for your time today Bob.

Bob Cunneen: Thanks very much Jason.

Jason Hazell: And thank you all for joining us.