Ryan Felsman, Senior Economist Twitter: @CommSec IMPORTANT INFORMATION AND DISCLAIMER FOR RETAIL CLIENTS The Economic Insights Series provides general market-related commentary on Australian macroeconomic themes that have been selected for coverage by the Commonwealth Securities Limited (CommSec) Chief Economist. Economic Insights are not intended to be investment research reports. This report has been prepared without taking into account your objectives, financial situation or needs. It is not to be construed as a solicitation or an offer to buy or sell any securities or financial instruments, or as a recommendation and/or investment advice. Before acting on the information in this report, you should consider the appropriateness and suitability of the information, having regard to your own objectives, financial situation and needs and, if necessary, seek appropriate professional of financial advice. CommSec believes that the information in this report is correct and any opinions, conclusions or recommendations are reasonably held or made based on information available at the time of its compilation, but no representation or warranty is made as to the accuracy, reliability or completeness of any statements made in this report. Any opinions, conclusions or recommendations set forth in this report are subject to change without notice and may differ or be contrary to the opinions, conclusions or recommendations expressed by any other member of the Commonwealth Bank of Australia group of companies. CommSec is under no obligation to, and does not, update or keep current the information contained in this report. Neither Commonwealth Bank of Australia nor any of its affiliates or subsidiaries accepts liability for loss or damage arising out of the use of all or any part of this report. All material presented in this report, unless specifically indicated otherwise, is under copyright of CommSec. This report is approved and distributed in Australia by Commonwealth Securities Limited ABN 60 067 254 399, a wholly owned but not guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. This report is not directed to, nor intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in, any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or that would subject any entity within the Commonwealth Bank group of companies to any registration or licensing requirement within such jurisdiction.

Economics | June 10, 2020

Consumers prefer to save and invest in shares Consumer Sentiment; CBA Credit Card The Westpac/Melbourne Institute survey of consumer sentiment index rose by 6.3 per cent in June to 93.7

points. Confidence is up 23.9 per cent after hitting 29-year lows of 75.6 points in April. But sentiment is still down 7 per cent from a year ago and below the long run average of 101.3 points. A reading below 100 points denotes pessimism.

Wisest places for savings: Consumers believe that the wisest place for extra savings is in the Bank (34.8 per cent of respondents, a 5½-year high). And there was a lift in consumers nominating shares (11.4 per cent, a 6½ year high). But real estate fell in saving preferences to a near record low of 9 per cent.

‘Spend it’: In the latest quarterly survey just 3.9 per cent of respondents thought the ‘wisest use of savings’ was to ‘spend it’ – the lowest survey response in 5½ years. Those preferring to pay down debt fell to a 4½-year low of 18.1 per cent.

Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating fell by 1.3 per cent to 97 points – the first fall in 10 weeks (long-run average since 1990 is 112.9). Sentiment had lifted for nine successive weeks - the longest stretch on record - since hitting record lows of 65.3 points on March 29.

Commonwealth Bank (CBA) card spending: According to the CBA, spending in the week to June 5 was up 5.2 per cent on a year ago (week prior: +3.3 per cent) with online spending up 8.5 per cent and in-store spending up 3.9 per cent.

The consumer confidence and card spending figures have implications for retailers, and other consumer-focussed businesses.

What does it all mean? Australia’s success in containing the coronavirus outbreak has seen restrictions eased and the re-opening of the

economy occur more quickly-than-anticipated. With the kids returning to school, return-to-work rates are increasing as businesses emerge from hibernation. The abating health crisis and government wage and welfare supports have lifted the mood around the country. Consumer confidence has steadily improved after hitting historic lows at the height of the pandemic outbreak and economic lockdown in April.

The restoration of confidence is most evident in the Commonwealth Bank’s weekly credit card spending data with spending momentum lifting over the past few weeks as shopper mobility has increased and stores have re-

June 10, 2020 2

Economic Insights. Consumers prefer to save and invest in shares

opened. A key support for consumers is the job market. While the jobless rate is expected to hit 8 per cent by the end of June, leading indicators of job hiring intentions are ‘troughing’. In fact, SEEK’s new job advertisement postings have lifted almost 50 per cent between April and May. And consumers’ unemployment expectations - in part due to the success of ‘JobKeeper’ – have fallen to 12-month lows in June.

That said, consumers remain wary about the economic outlook, especially with Australia now in the midst of its biggest economic contraction since the Great Depression. In fact, in Westpac-Melbourne Institute’s latest quarterly survey just 3.9 per cent of respondents thought the ‘wisest use of savings’ was to ‘spend it’ – the lowest survey response in 5½ years. And those preferring to pay down debt fell to a 4½-year low of 18.1 per cent.

And consumers believe that the wisest place for extra savings is in the Bank – at a 5½-year high of 34.8 per cent of respondents. There was a lift in consumers nominating shares (11.4 per cent – 6½ year high), but real estate fell to a near record low 9 per cent – with home price expectations falling in June.

What do the figures show? Consumer confidence – June

The Westpac-Melbourne Institute Index of Consumer Sentiment rose by 6.3 per cent in June to 93.7 points. Confidence is up 23.9 per cent after hitting 29-year lows of 75.6 points in April. But sentiment is still down 7 per cent from a year ago and below the long run average of 101.3 points. Readings below 100 points denotes pessimism.

Wisest place for savings: Overall 34.8 per cent of respondents believe the wisest place to put new savings is in the bank – a 5½ year high. And 11.4 per cent of consumers nominated shares – the best outcome in 6½ years. Further, a near record low of 9 per cent believe the wisest place for savings is real estate, down from 13.1 per cent in the March quarter.

In the latest quarterly survey just 3.9 per cent of respondents thought the ‘wisest use of savings’ was to ‘spend it’ – the lowest survey response in 5½ years. The proportion of people that ‘don’t know’ where is the wisest place to put new savings rose from 5.7 per cent to 7.4 per cent. Those preferring to pay down debt fell to a 4½-year low of 18.1 per cent. Finally, superannuation was seen by 4.5 per cent as the wisest place for their savings (a 3½-year low).

Consumer sentiment – Week ended June 7

The weekly ANZ-Roy Morgan consumer confidence rating fell by 1.3 per cent - the first fall in 10 weeks - to 97 points (long-run average since 1990 is 112.9). Sentiment had lifted for nine successive weeks - the longest stretch on record - since hitting record lows of 65.3 points on March 29 (lowest since 1973).

Three of the five major components of the index fell last week:

June 10, 2020 3

Economic Insights. Consumers prefer to save and invest in shares

The Commonwealth Bank (CBA) credit card data – Week ended June 5

CBA card spending in the week to June 5 was up 5.2 per cent on a year ago, compared to a 3.3 per cent lift for the week ended May 29. Online spending rose 8.5 per cent and in-store spending was up 3.9 per cent over the period.

CBA Group economists said, “Momentum on goods spending slipped slightly, while services spend improved a little with the easing of restrictions helping the services economy a little more.”

By category: “The largest lift in spending momentum was seen in the personal care category as restrictions were eased in the largest states for beauty salons. Annual spend growth in this category recovered as pent up demand after three months of closures could be satisfied. Annual growth was 12 per cent on the same week last year (week ending 5 June), compared to -15 per cent the prior week and -61 per cent at its low for the week ending 10 April.”

By region: “The easing of restrictions in Victoria, which were the strictest in the country, has seen spending momentum lift in that state. Spending is now positive compared to a year earlier, rising at 3 per cent for the week ending 5 June, and now closer to the momentum in NSW which did see some easing of restrictions earlier. In other states, spending momentum slowed in Queensland, but lifted in NSW, WA and Tasmania.”

What is the importance of the economic data? Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to

Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.

The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.

The weekly Commonwealth Bank (CBA) household credit & debit card spend data is derived from transaction authorisations to give a near real-time view. This means that cancelled authorisations, refunds, reversals, etc. will not be included. Data has not been adjusted for effects of consumers substituting between cash and card payments. CBA merchant facility spend data is derived from the Merchant Acquiring System which includes net sales from both CBA and Other Financial Institution (OFI) domestic and international cards.

What are the implications for interest rates and investors? Consumer confidence is back to levels last seen before the pandemic outbreak. Optimism is growing with the

economy re-opening and COVID-19 restrictions gradually being eased. Government payments have been landing in Aussies’ bank accounts. Views on the economy are improving, despite data last week all but confirming that Australia is experiencing its first recession in 29 years.

But elevated unemployment, an easing in home prices and the withdrawal of government stimulus support (such as childcare) will likely keep Aussie consumers ‘on guard’.

The urge to ‘reward ourselves’ after the lockdown with a ‘big ticket’ purchase is evident in todays’ June sentiment survey (up 10.1 per cent in June), but we are also keen to save and put our money to work in the sharemarket with interest rates near zero.

Ryan Felsman, Senior Economist, CommSec Twitter: @CommSec