The depth of fear out in consumer land was highlighted today by new data showing consumer sentiment fell by 4.6% in February as the economic crisis worsened.
The Westpac-Melbourne Institute of Consumer Sentiment is now at a three-month low of 85.8, and Westpac chief economist Bill Evans described the data as “truly unique”. Not even a 1% interest rate cut and the announcement of the Government’s $42 billion stimulus package could lift consumers’ moods.
Evans says the steady slowdown in growth in total housing credit indicates that those households currently holding a mortgage are focused on reducing debt, not on spending.
ANZ senior economist Katie Dean says the result is a “very disappointing read”, and that fears of unemployment drove the index down.
“The fall was driven by a sharp deterioration in expectations for family finances, which fell 12.2% in February. Heightened uncertainty about job prospects is clearly affecting the householders’ psyche,” she says.
“Consumption will be the difference between a modest and a deep recession. Modest growth in consumer spending is required to help offset the expected sharp fall in business investment. The 1990s experience and the 2000 mid-cycle slowdown shows that a sharper fall in consumer spending must be averted if Australia is to avoid a deep recession.”
Dean predicts the RBA will continue to cut interest rates.
“With sentiment this fragile, can the RBA afford to pause in March? We don’t think so.”
Evans agrees, and expects a cut of 0.75% in March. “While it is clear that the global recession represents an ongoing threat to the Australian economy, and further policy easing will be required, the bank will be mindful of the need to retain flexibility to address the domestic slowdown through 2009.”
But there was some good economic news this morning, with ABS data showing housing finance approvals grew strongly in December, rising 6.4%. Overall, the value of housing finance commitments for all dwellings over the month increased by 5.9%.
Mortgage Choice managing director, Paul Lahiff said the housing market is showing signs of having turned the corner.
“With the third consecutive month of data showing improved housing finance demand across major categories, we are confident the industry has passed a crossroads and is heading in the right direction, at least until the First Home Owners Boost has run its course.”
Shares slide
The Australian sharemarket has opened 2.2% lower today after a poor session on Wall Street overnight.
The benchmark S&P/ASX200 index was down 43.3 points or 1.24% to 3445.4 at 12.00 AESDT. The dollar also fell to US65 cents.
NAB shares lost 2% to $18.38, BHP Billiton dropped 3.3% to $32.25, while ANZ fell 2% to $12.20. Commonwealth Bank shares lost 1% after news the company’s first half earnings fell 16% to $2 billion.
Wall Street suffered its biggest one-day drop since December, with the Dow Jones Industrial Average falling 4.6% as investors reacted badly to Treasury Secretary Timothy Geithner’s financial rescue plan.
Analysts say Geithner’s plan, which would use the remaining $US350 billion of the bailout bill to restore credit and clean up $US2 trillion worth of assets, was simply too vague.
“This is not a clear-cut plan. It is reminiscent of previous plans where there was convoluted calisthenics to try to fix this thing. That’s not what investors are looking for,” Bucky Hellwig, an analyst with Morgan Asset Management, told Reuters.
“Investors want clarity, simplicity and resolution. This plan is seen as convoluted, obfuscating and clouded,” said James Ellman, president of Seacliff Capital in San Francisco.
Obama stimulus bill edges along
The news comes as the Senate approves President Barack Obama’s $US838 billion economic recovery package, but will continue to debate this week over the final structure of the legislation.
While Obama wanted the legislation ready to be signed by this weekend, both the Senate and the House of Representatives will spend the next few days reconciling differences between their own versions of the bills.
The delays are clearly frustrating Obama, and for good reason – the US economy gets worse by the day.
Overnight, troubled car manufacturer General Motors said it will cut 10,000 jobs and introduce pay cuts on white collar workers.
The cuts, which will affect about 14% of the company’s workforce, will be finalised by 1 May, while most of the remaining US staff will take pay cuts of up to 10% for the rest of the year.
The company is hurrying to present a restructure plan to the US Government, from which it borrowed $US13.4 billion in loans in December.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
