Monday, 19 September 2016

What's behind the slide in optimism?

The latest quarterly Westpac McDermott Miller survey of consumer confidence came out this morning, and much of it was pretty positive. But there was one chart in particular that I was keen to see, and it was that mysteriously saggy 'outlook in five years' time' one that's been puzzling me for a while. Here's the latest reading.

The odd thing is that, after a surge of relief  in late 2009 and early 2010 that the worst of the GFC had passed by, people in New Zealand have steadily turned less optimistic about New Zealand's future prospects, despite our recent strong business cycle.

And it's not an oddity of the Westpac McDermott Miller survey: exactly the same pattern shows up in the ANZ Roy Morgan consumer confidence survey.

So why this steady loss of optimism?

That latest bounce in the Westpac reading (and the smaller lift in the latest ANZ one) suggest part of what's going on: it looks as if both measures are picking up the recent improvement in dairy prices. As Westpac commented, "Despite picking up, the number of households expecting favourable economic conditions in five years’ time remains at some of the lowest levels we’ve seen in decades, with those in rural areas especially downbeat...Recently, we’ve seen global prices for dairy starting to
improve, and we’ll be watching to see if confidence in rural regions also starts to lift over the coming months".

International trading conditions are clearly one of the drivers of these measures: they can also be seen in that dip in the ANZ survey readings in mid 2015, which coincided with volatility in world financial markets when it seemed the global economy might be running out of oomph (people at the time were worried about China in particular). Evidently the people surveyed think that (some recent improvement in dairy prices excepted) the world economic outlook is not crash hot at the moment, which looks to be a realistic assessment: every recent major review of the world economy has found it is growing more slowly than usual - as shown for example in this indicator of the world economy from J P Morgan/Markit - and that the balance of risks is tilted to the downside.

There are also probably a couple of other things feeding into the downbeat mood. One is expensive house prices. As the ANZ commented, "Higher house prices aren’t a win for all. Confidence in the 25-34 year bracket (first home buyer heartland) continues to see-saw: as house price expectations rise, their confidence in current conditions falls and vice versa", and I wouldn't be the least bit surprised if very expensive housing isn't feeding into lower longer-term confidence as well.

I wondered if politics also had something to do with it, but neither the ANZ nor the Westpac surveys have questions obviously linked to political perceptions. So I turned to the separate Roy Morgan research which asks people, "Generally speaking, do you feel that things in NZ are heading in the right direction or would you say things are seriously heading in the wrong direction?".

There's a rough and ready fit: in the ANZ, Westpac and Roy Morgan graphs, there's been a rise over 2012-14 and slide over the past couple of years. People are still, on balance, happy with where the country is being taken, but not as happy as they were. What this says I'm not sure: perhaps people feel that somewhere over the next couple of elections, a safe pair of hands will be replaced by something less predictable? Or are they becoming progressively disenchanted with steady as you go and don't frighten the horses?

In sum, that slide in optimism, which seems at odds with the current strong state of the business cycle, can, I reckon, be unpicked - a realistically downbeat assessment of the world economy, a close concern with trends in commodity prices, angst over the dream of home ownership, and, for one still unclear reason or another, some modest loss of confidence in political direction.


  1. Another option, and this probably relates more to 2008/9/10. In the depths of the GFC, when things were as bad as they could get etc. it seems reasonable to think that in 5 yrs things will be better. Similarly at the moment, if you believe the government spin things are good, so it could be reasonable to think that it won't last.

    Related, do we have a reference point. I don't know if people think it is bad now and going to get worse, or good now and going to get worse. Perhaps they need to have two linked questions, 1) how good/bad is it now, 2) how good/bad will it be in 5 yrs?

  2. Thanks for those comments.

    Your first comment is exactly right - I thought of it as I was writing but it went in one neuron and out the other - and yes, if you're in the absolute pits prospects are always going to look better, and similarly if you're in peak form things can only get worse. Spot on.

    On reference points, we do have some. In the Westpac/McDermott Miller one, there's a question about households' current financial situation (somewhat better than usual) and an overall 'present conditions' index (a smidgen better than usual). In the ANZ/Roy Morgan one, again there's current financial condition compared to a year ago (modestly positive) and they also derive a 'current conditions' index (also positive).

    We also have another reference point, how people think the next year will go. That's holding up well in both surveys, so evidently people are OK with the next year but not with the next five. That was one of the things that got me thinking about a political angle, as the next election is just over that one-year time frame (plus there's be another before the five years is out).

    You may have seen by the way that Michael Gordon at Westpac responded on Twitter saying my explanation was "Not that simple I'm afraid. The downtrend has been consistent across regions, as well as age and income groups". I think he was referring to my interpretation that the index was capturing commodity prices, though I did say I thought there were other things going on, too. In any event there seems to be something quite widespread, which we can at least partly nail down, but there may also be something else lurking in the national psyche.


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