Investors are looking for a sense of where interest rates are heading around the world. Consumer confidence is one of the best guides.
Consumer spending is a key driver of between 50% and 70% of economic activity in developed economies like the US and Australia. How consumers feel is critically important to economic growth and the outlook for monetary policy.
So what is consumer confidence telling us now?
Americans spending up
In the US, consumer confidence is running at almost-record highs, and certainly at the highest level since early 2000. That confidence is driving strong consumer spending in the US.
But there is still scope for Americans to increase their spending because they are saving quite a lot of money. They can run down those savings to spend more.
At the same time, strong employment growth, signs of a pick-up in wages, and tax cuts will all keep consumer spending quite strong. That supports our belief that the US Federal Reserve will keep raising interest rates at a gradual pace.
Good but not fantastic
Elsewhere around the world the story is more mixed.
In the eurozone consumer confidence is high relative to its own history, but it’s not shooting the lights out. It’s ok; down slightly from early this year, but it’s keeping growth ticking over in the eurozone. Japan is similar; consumer confidence is good but not fantastic.
It’s a similar story in Australia. Consumer confidence is running around its long-term average. It had been above average, but then fell sharply in September after the political turmoil in Canberra. Consumer confidence rebounded 1% in October.
Wage and housing worries
That average level of consumer confidence is roughly consistent with average household consumer spending in Australia.
The big thing to worry about is very low wages growth and falling house prices in Sydney and Melbourne. Auction sales volumes are well down from the highs of last year and running around 50% or less in both Sydney and Melbourne, which is consistent with further price declines. Our forecast is for top-to-bottom falls of around 15% out to 2020 in these two cities and there is risk on the downside.
Sluggish wages growth and house price falls in the major capital cities are going to be a bit of a drag on consumer spending in Australia going forward.
When you think about the big picture on interest rates, consumer confidence provides a good guide. The US Fed is raising interest rates. There is less urgency in Europe and Japan.
And in Australia, similarly, there is no urgency to raise rates. If anything, you could still debate whether the next move in rates here might be a rate cut given those concerns about falling house prices.
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