Consumers are finally getting the message

The message is finally sinking in – and the first businesses to feel the bite will be dealing with worried consumers.

There is no doubt that the financial institutions have had a few wonderful years and are now facing pressures on their cost of funds. Everyone who has taken the flight to safety with their stocks has a vested interest in them maintaining their profits, including all of our superannuation funds.

Even if the Government still gives us the $31 billion tax cuts that are encouraging the Fairer Deal segment to be “true believers”, there will be major efforts to get us all to save more and spend less.

The unions’ call to make the tax cuts payments directly into superannuation, and Treasurer Wayne Swan’s promise to RBA’s Glenn Stevens to take $18 billion out of the forward estimates, is going to make it a very tough time for small business expansion inside Australia.

There will be plenty of funds for well developed export plans, and very good opportunities for those with access to cheap quality imports, but service industries and retailers are going to find that many households have started to address their credit card debt and are finding petrol and rising house repayments a significant reason to cut shopping trips.

As stated at the start of this year, St Valentine’s Day need not be a massacre if you have shortened your terms of trade, focused on your best prospects and avoided trashing your company credit cards on too good a time in the next couple of months. Not surprisingly, our range of small businesses were pleased to be contacted by a newly minted “your bank relationship manager” who now wants to help with growing our business.

Yesterday, Mike Preston reported Westpac’s Consumer Confidence index fell below the 100-point average line for the first time since November 2006. Obviously Glenn missed my column that encouraged the RBA to look beyond the Westpac aggregates to the underlying reality as shown by Roy Morgan’s Gary Morgan and Michele Levine’s detailed study of the mind of the market.

The graph below shows the relationship between the Westpac Consumer Sentiment Index (pink line) and the Roy Morgan Consumer Confidence Index over the past decade. The former is always more pessimistic and has no way of showing the different mind sets that make up the market. This is a pity since the RBA still believes in collectively punishing the household and renting classes as a way of scaring, as Mike pointed out, the lending and boardroom class.

More significantly, the only segment of the population that had an increase in consumer confidence this year is the Fairer Deal segment – the working classes expecting Rudd/Gillard to redress a decade of declining standards of living with a real wage breakout (up from 104.6 in December to 122.5 by I February).

Over the same period the three “AB” quintile segments that make up the top 20% of the population have learned that Wayne and Glenn have them in their sights.

The Socially Aware segment have plummeted from 135.3 to 119.4; Visible Achievement dropped 10 points from 130.5 to 120.4, and Young Optimism even began to have some doubts about their future (down from 137.2 to 129.9). The most affluent segments are getting the message.

If the RBA continues to enjoy inflicting more pain by raising interest rates to create a massive credit crunch for investors (Real Conservatism has dropped from 123.3 to 114.2) and the small business operators (Something Better down from 126.8 to 115.2) they are very likely to drive home interest rates up around the double digit rate by the end of this year.

For the full details go to Roy Morgan Research and go to Marshall Place (consumer-confidence) for the global trends in consumer confidence.

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