Westpac – MI Leading Index and Consumer Sentiment Index – November Issue

Westpac Economics falls under the cohort of Westpac Institutional Bank within Westpac Banking Corporation (ASX: WBC). Melbourne Institute is Australia?s one of the most significant economic and policy research institutions within the University of Melbourne.

?Westpac ? MI Leading Index

The index improved to -0.91 per cent in October compared to -1.01 per cent in the previous month. However, the index continues to remain materially below trend, indicating a weak economic momentum is likely to be carried into 2020.

Westpac Economics said that the below trend view of the Australian economy is consistent with its forecast for GDP growth in 2020, standing at 2.4 per cent compared to a trend growth rate of 2.75 per cent.

It was acknowledged that the Reserve Bank of Australia (RBA) had revised the growth forecasts for 2019, 2020 and 2021, maintaining a view that the year-on-year growth in the next year is likely to return to trend at 2.8 per cent for the first time since 2016.

Westpac Economics noted that its views compared to the central bank on the GDP expectations contradict around the timing residential dwelling investment recovery and extent of the outlook for business investment.

Westpac believes that the household expenditure is likely to remain below trend for another year, and the outlook is specifically dependent on the policy responses and downside risks.

In the last six months, the index deteriorated from a growth rate of -0.53 per cent in May to -0.91 per cent in October. Predominantly, the major components in this shift include;

• a sell-off in commodity prices,
• mixed performance of the Australian share market,
• deterioration in consumers? unemployment expectations,
• deterioration in general consumer expectations,
• slowdown in monthly hours worked.

In contrast, the positive impact to the index was caused by RBA?s rate cut in October, marginal improvements in US industrial production, and dwelling approvals.

Reserve Bank of Australia is due to meet on 3 December 2019, and Westpac Economics expects the Board to hold the cash steady, suggesting that the November meeting minutes provide a view that the Board continues to have a clear easing stance. However, the Board has taken up ?monitor mode? presently.

Westpac Economics anticipates that the Board would be monitoring the incoming data until February to witness the impact of the rate cuts since June this year. The impact of previous rate cuts would form the base for the next cash rate decision, and policy actions for the future which might include unconventional measures.

Westpac-MI Index of Consumer Sentiment

In November, the Westpac-Melbourne Institute Index of Consumer Sentiment increased by 4.5 per cent to 97 compared to 92.8 in October, after falling 5.5 per cent in October.?

The index had depicted a similar pattern noted before ?? falling when RBA had lowered rates in July and rising when rates were kept steady. Westpac believes that this movement and similarity depict the collective that consumers are worried about the low rates and media controversy around the banks? responses.

It was said that the index plummeted by around 4 per cent since RBA started lowering the cash rate in June while trending below the 100 level. Relatively better performance in the equity markets had helped to add some gains to the index.

The ongoing US China trade talks would continue to hold the key, and markets have already priced the satisfactory outcomes of the current discussions.

Westpac believes the consumers? sentiments might have increased due to the media coverage about introduction of the personal income tax cut legislation in July 2020 instead of July 2022 by the Commonwealth Government.

Intriguingly, the index recorded a rise in all components in November:

• the ?economy, next 5 years? sub-index increased by 5.2 per cent (down 9.1 per cent in last month),
• the ?economy, next 12 months? sub-index rose 4 per cent (down 6 per cent in last month),

Family finances have depicted a firmer stance in the past two months. However, the gains remain subdued, considering the interest rate cuts, personal income tax reliefs rolled out since July and turnaround in the housing markets.

• the ?finances vs a year ago? sub-index increased 5.2 per cent.
• the ?finances, next 12 months? sub-index grew 5.7 per cent.

Consumer attitude towards spending outlook appears to be downbeat during the important sales period of Christmas. It was also said the indicator of discretionary spending is trending lower compared to the long run average, suggesting unfavourable environment for discretionary sales.

• ?time to buy a major household item? sub-index increased 3 per cent.

In November, the Westpac-MI Unemployment Expectations Index rose 3.6 per cent to 136.5, marking the highest reading since July 2017. This indicates that the consumers are expecting a higher level of unemployment in the periods ahead.

Housing data had depicted stability in the November reading. However, the buyers? sentiment continues to reduce in New South Wales and Victoria, indicating that rising prices are suppressing affordability. In contrast, the buyer sentiment remains relatively well supported in Queensland, Western Australia and South Australia.

The housing price indicators depicted the first decline since May, but the consumer price expectations continued to strengthen in New South Wales with declines in Queensland and Victoria.

• ?time to buy a dwelling? index rose 2.1 per cent.
• Westpac-MI Index of House Price Expectations Index fell 1.6 per cent.

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