In a clear shift of the policy bias, the August RBA Board meeting Statement replaced the phrase in the all important final paragraph "some scope for further easing of monetary policy" that was in the July Statement, with "the present accommodative setting of monetary policy is appropriate". That shift from an easing bias to neutral was taken a step further in the August Statement on Monetary Policy (SoMP), with the key introduction section's final paragraph noting "with the cash rate at an unusually low level and the global economy stabilising, movement towards a more normal setting of monetary policy could be expected at some point if further signs of a durable recovery emerge."
In identifying the risks to the Australian outlook, the August SoMP highlighted the key domestic risk is that private sector demand will weaken from its robust pace in the second half of the year led by the consumer, due to the withdrawal of the first half fiscal transfers boosters and, presumably, a softening in confidence. The SoMP noted: "Domestically, the main downside risk is that some of the recent improvement in economic indicators simply reflects changes in the timing of overall spending, partly due to fiscal measures, and that over the second half of the year private sector demand will weaken again."
Our view of the likely dynamics in the domestic economy points to a slowing in consumer spending growth in the second half of 2009, with the annualised growth pace of consumption slowing from a robust 3 per cent in the first half to around 0.5 per cent in the second half .
Naturally, the key to whether this the second half stalling of consumption growth eventuates will be the reaction of households to the curtailment of fiscal payments with the dropping out of the first half one-off transfers boosters, and the impact on households of the recession-like contraction in aggregate hours worked (which have fallen almost 3 per cent in the year to July despite only a 0.1 per cent annual fall in trend total employment) and therefore incomes. While the income hit from the end of fiscal transfers and reduced labour utilisation via hours worked is essentially 'baked in the cake', the extent of the impact this will have on consumption growth will hinge on: (i) notional savings 'reserves' households have accumulated from the $21.4 billion of Federal Government one-off payments since November 2008; and (ii) the willingness of households to draw on these savings reserves to maintain consumption levels.
In a further effort to quantify how much of the $21.4 billion in payments are sitting in a notional reserve, our August Westpac–Melbourne Institute Consumer Sentiment Survey included a special question asking respondents what proportion of the one-off fiscal payments from the Federal Government over the last six to 12 months they had spent. Responses were classed between four categories: (i) none; (ii) less than 50 per cent; (iii) more than 50 per cent; and (iv) 100 per cent. The Survey found that of those that had received a payment, 62.2 per cent said they had spent all of it, 7.8 per cent said they had spent more than half, 9.8 per cent said they had spent less than half, and 20.2 per cent reported spending none at all.
From these results we derived roughly how much of the payments may still be sitting in a notional savings reserve. We assumed payments were evenly spread across the recipients, and that their actual spending was normally distributed around the range mid-points. In other words, those responding that they had spent "less than 50 per cent" were assumed to have spent 25 per cent, and those saying they had spent "more than 50 per cent" were assumed to have spent 75 per cent of their payments. The bottom line from this analysis was an implied unspent portion of the stimulus of $6.3 billion, or almost 30 per cent of the $21.4 billion total.
While these estimates may be rough, the clear implication is that there is still a substantial unspent portion of the stimulus – equivalent to 3 per cent to 3½ per cent of quarterly consumer spending, or 9 per cent to 10 per cent of quarterly retail sales. What consumers choose to do with these savings reserves remains to be seen. However, our calculations show there is scope for a sizeable drawdown over the second half of 2009, allowing consumers to maintain spending at high levels despite a fall back in disposable income as the fiscal policy boosters drop out.
As to the willingness of consumers to tap these savings reserves to maintain consumption, this will largely depend on levels of consumer confidence, in particular their perceived job security.
The signs from our Westpac–Melbourne Institute Consumer Sentiment Survey to date are encouragingly upbeat. With 95 per cent of the fiscal payments disbursed by the end of May, we have now seen three months of survey data (with this week's Survey for August) without fiscal transfer boosters. It would have been logical to have expected some 'let down' in consumer confidence gauges with the end of the handouts, weighing on indexes over June to August, relative to the period of disbursement from November 2008 to May 2009. However, any downdraft this may have had on confidence levels has clearly been more than offset by the improving global and Australian economic outlook.
The aggregate Westpac–Melbourne Institute Consumer Sentiment Index averaged 88.6 in the November 2008 to May 2009 transfers disbursement period, but has subsequently risen to average 107.6 from June to August, up 21.5 per cent, with the August read of 113.4 the highest since October 2007. Opinions on the 12-month outlook for family finances have risen from a disbursement period average of 104.8 to a post-disbursement average of 117.4 – up 12.0 per cent. The key driver of this improvement in confidence has been opinions on the economic outlook, both medium and long term.
The improvement in opinions on the five-year economic outlook from the disbursement period average to the post-disbursement period average has been 21.7 per cent, neatly matching the aggregate Index improvement. The August index level for this component was 123.1, up 45.2 per cent from a February 2009 low to a record high. The improvement in opinions on the 12-month economic outlook has been particularly strong at 63.5 per cent. The August index for this component was 113.3, up 112.9 per cent from a March 2009 low to its highest since December 2007. Opinions on whether it is a good time to buy major household items have also improved markedly, rising 17.5 per cent from their disbursement period average to their post-disbursement period average. The August index for this key lead indicator of consumer spending was 126.9, up 78.6 per cent from an October 2008 low to its highest since July 2007.
This improvement in consumer confidence measures has also been associated with a marked rise in consumers' perceived job security over the last six months, as the unemployment rate uptrend has proved to be more gradual than was initially feared as employers have focussed on reducing labour inputs through lowering hours worked, rather than outright job shedding. This phenomenon has been embodied in offsetting gains in part-time employment to the
full-time fall, for a net fall of only 0.1 per cent in the trend level of total employment in the 12 months to July 2009.
However, over the same period, aggregate hours worked of all employed persons have trended almost 3 per cent lower. While this fall in aggregate hours worked is still a 'recession-like' outcome, and historically well correlated coincidentally with domestic final demand growth, the improvement in job security suggests an increased probability of consumers who are labour market insiders (that is, in employment) choosing to tap their accumulated savings to maintain spending levels through the second half of 2009.
The Westpac–Melbourne Institute Unemployment Expectations Index surveys consumers' expectations as to whether they expect unemployment to rise, stay the same, or fall over the coming 12 months. An index greater than 100 indicates more respondents are expecting unemployment to rise, and vice-versa, so a fall in the index represents an improvement in consumers' perceived job security. This index (with the latest reading for August) has now fallen for six consecutive months, from a February 2009 peak of 183.1 to an August level of 136.5 – a cumulative 25.4 per cent improvement in 'job security'.
Aside from the positive for job security from the improved economic outlook and milder than expected uptrend in the official unemployment rate, this rise in job security has also probably been driven by what consumers have observed in the 'real world' experiences of their family and friends. One would imagine it is far
easier to notice as you leave for work in the mornings that your neighbour has lost his or her job, and their car is still in the driveway, adding to insecurity over the permanence of your own job, than to notice if your neighbour's hours have been reduced instead.
In conclusion, surveyed consumer responses on the proportion of the one-off fiscal payments spent have allowed us to back out an estimate that around 30 per cent of the $21.4 billion in payments are sitting in a notional savings 'reserve' of households. This is in line with estimates we have compiled using official ABS statistics, and suggests there is scope for a sizeable drawdown of savings over the second half of 2009, allowing consumers to maintain spending at high levels despite a fall back in disposable income from the recession-like decline in hours worked and the dropping out of the temporary fiscal boosters.
Clearly improving measures of consumer confidence and in particular, job security, suggest an increasing likelihood of consumers choosing to tap these savings reserves, in turn implying risks of a less pronounced slowing in consumer spending growth in the second half of 2009 from the first half than our forecasts currently expect.
Matthew Hassan and Anthony Thompson are senior economist at Westpac.