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GFC hangover still impacting on consumer confidence

by Media Services on 7 May 2011
Consumer sentiment slow to pick up. MIAA
Consumer caution, led by born again budget-conscious and debt-fearful women, will hinder the Australian economic recovery, according to Commonwealth Bank of Australia chief economist Michael Blythe.

Speaking at the Australian Institute of Company Directors (AICD) business breakfast in Brisbane last week, Blythe was explaining the economic backdrop framing the economy.

In the lead up to the Federal Budget announcement slated for next Tuesday (May 10), Blythe described the economic backdrop as quite good and says it will remain good for the next couple of years, although there are some risks involved.

'From our research, when you turn to domestic risks, a big one is the consumer who is far more interested in savings and paying off debt than spending, so this cautious consumer and how that evolves will have an effect on the economy,' he said.

'It’s not so much consumer caution, it’s retail caution that we should be thinking about - one third of consumer spending is in the retail sector, so the retail sector is currently in pain. We also found that women dominate decisions in the retail sector of spending and men tend to dominate the spending decision in the non-retail areas of the economy.

'What stands out about this is that our female client base is much less optimistic about the outlook than our male client base, so the less optimistic the group that controls retail spending is the weaker that sector will be. To change those perceptions, there needs to be a strong labour market.'

Blythe says consumers should prepare for an environment where interest rates will increase over the next year due to two key factors.

'There are two indications that interest rates need to go up – there are inflationary reasons and with the mining boom, another sector has to step back and make room and the only sector big enough to do that is the household sector. Putting up interest rates has always been an effective way of putting a lid on household activity.

'When commodity prices rise, it tends to boost the nominal GDP rate. Real GDP over the next few years will grow by t3 to 3.5 per cent. At the same time, we think nominal GDP will grow by 7 or 8 per cent per (annually) and that’s an above average outcome.

'The mining boom mark two won’t deliver the same roads of gold that the mining boom mark one delivered, we’ve compared key indicators like profits, growth in capital spend and taxes paid by the mining sector.'

When the budget is released next week, Blythe said the economy is likely go into savings mode to counter its deficit.
'The various natural disasters will add to deficits and a flood levy will start later this year so we’re off track to getting back to a surplus in a few years time,' he explained.

'At this stage, it looks like a lot of savings measures will be pushed through, like means testing of the health insurance rebate, which will most certainly go through this time round and changes to middle class welfare payments.
'In terms of new spending, I think it will go towards mental health initiatives, education and training, incentives to encourage people from welfare back into the workforce and incentives for infrastructure related spending.'
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