Consumers still struggling to be positive

12 Sep 2012, 5:48 pm   -   Source: AAP

Pessimists remain in the majority, despite new data showing consumer confidence has risen slightly.

Interest rate cuts, government handouts, low unemployment and an economy that's recorded an unprecedented 21 years' expansion isn't enough to send the nay-sayers scurrying.

New data released on Wednesday shows consumer confidence modestly improved in September but pessimists still outweigh the optimists.

Weak sentiment continues to have a detrimental impact on retailing and demand for housing, with other new figures showing new home building remains in the doldrums.

"The consumer is clearly stuck in an extended `cautiously pessimistic' phase," Westpac chief economist Bill Evans said.

The Westpac-Melbourne Institute consumer sentiment index has risen by 1.6 per cent to 98.2 but remains below the 100 mark for the seventh consecutive month - the level that separates optimists from pessimists.

Apart from the 2008-2009 global financial crisis period when the index was below 100 for 16 consecutive months, this is the longest sub-100 run since the early 1990s.

This is despite 125 basis points of rate cuts by the Reserve Bank of Australia (RBA) since November last year, a jobless rate of 5.1 per cent that is deemed to be close to full employment, and a $1.9 billion boost to households in the May federal budget.

The June quarter national accounts released last week also confirmed the economy had enjoyed 21 years of uninterrupted expansion.

Mr Evans said the level of confidence did not bode well for consumer spending, noting recent July retail sales data dropped by 0.8 per cent.

He said only the fall in the unemployment rate and the ongoing surge in mining investment countered the case for lower interest rates.

But even then, Mr Evans said the fall in the unemployment rate had been due to the discouraged worker affect, while some mining companies had recently downgraded investment plans.

"We think the case for lower rates has already been made and there must be a reasonable chance that the Bank will decide to move in October," he said.

"However, central banks are conservative, so a November call for the first move looks to be more prudent."

Master Builders Australia chief economist Peter Jones agrees further rate reductions are needed.

He says other data showing a 4.6 per cent rise in home building starts in the June quarter compared to the previous three months are of "cold comfort" for builders who continue to face very difficult operating conditions.

Total dwellings starts for the 2011/12 financial year of a little more than 139,000 are down 11.5 per cent on the previous year.

Just 34,116 commencements in the June quarter is the second lowest quarterly number for three years, at a time when the economy was still feeling the heat of the global financial crisis.

"Further rate cuts from the Reserve Bank are needed to turn consumer pessimism around and ensure that demand recovers," Mt Jones said.

"The housing sector has been under-building for the past seven years and it is crucial that Australia's residential building industry now embarks on a major growth phase to overcome the housing shortfall."

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