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Low consumer confidence likely to hit banks and retailers

The results of the latest Westpac/Melbourne institute consumer confidence survey have prompted renewed speculation that the RBA has scope to drop interest rates in coming months. The index of consumer sentiment dropped 0.1 point to 102.1 from June to July, with a score above 100 indicating optimists outnumber pessimists. The index is 3% higher than a year ago.

The reading of 102.1 is around 8% below March highs when the share market was on a steady upwards run and interest rate cuts appeared to be flowing through to the economy. Since then a severe drop in the Australian dollar has reversed most of the share market gains and data on the economy has shown signs of weakness. These concerns, along with the ongoing slowdown in mining investment and associated negative press, have had a detrimental effect on the consumer.

The consumer confidence measure is closely linked to consumer discretionary and investment spending. A low reading may point to difficult times for Australia retailers and banks, as consumers are less willing to spend and demand for credit stagnates until there is more certainty in the direction of the economy.  As an aside, the low Australian dollar may help domestic retailers such as Myer (ASX: MYR) and David Jones (ASX: DJS) in the medium term as overseas purchases become more expensive with a falling dollar.

While the survey was generally downbeat, it highlighted some interesting trends. Confidence in the global economy over the next five years rose 9.2%, however there was a 5.6% and 2.7% drop in confidence about current household finances and personal finances in the next 12 months respectively.

Additionally, the survey highlighted some interesting differences between demographics. Overall confidence in males dropped by 5.9% compared with a rise of the same magnitude for women, and interestingly over the past 12 months confidence among liberal voters is up 17.6% compared with a drop of 9.2% for labour voters.

Foolish takeaway 

The RBA’s drop in interest rates to a record low of 2.75% appears to have had little influence on consumer confidence. The measure was essentially flat in the past month, while it is up marginally over the past year. Low confidence may impact the earnings of Australian retailers and banks if maintained over the medium term, but may give the RBA scope to lower interest rates further in the coming months. Any drop to rates which leads to stronger economic growth will likely provide a boost in consumer sentiment and spending over the medium term, broadly benefitting retailers and the major banks.

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Motley Fool contributor Andrew Mudie does not own shares of any companies mentioned in this article.

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