In November the Westpac-Melbourne Institute Consumer Sentiment index surged for the first time since the beginning of 2009, after the central bank cut its benchmark interest rate in response to a declining threat of inflation, and fears of uncertainty in Europe.

The index of consumer confidence rose by 6.3 per cent in November after the Reserve Bank of Australia slashed borrowing costs to 4.5 per cent from 4.75 per cent at the start of the month.

The index rose to 103.4 points during November, up from 97.2 points October, the Institute said in a statement.

“This result is around our expectations and is clearly driven by the decision by the Reserve Bank to cut the official cash rate,” said Westpac chief economist Bill Evans.

In justifying its decision the Reserve Bank cited easing inflation pressure, an increased threat of higher unemployment and the potential for the sovereign debt crisis in Europe threatening to spill over into the rest of the world.

In November the RBA also revised down its economic growth and inflation forecasts out until the end of 2013.

Unsurprisingly, Mortgage were the most optimistic, posting a 13.9 per cent gain in confidence as all major lender quickly reacted to the interest rate decision, by passing on the rate cut to their borrowers. Mortgage free home owners posted a 6 per cent increase in confidence, whilst the confidence of tenants fell by 6.8 per cent.

The index’s level is the highest it has been since May, suggesting that pessimists are slight outnumbered by their optimistic counterparts for the first time since June

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According to the closely watched NAB Monthly Business Survey, in the month of June, business confidence continues to slide as the gap between the strongest and weakest industries widened to near record levels.

The NAB survey suggests that business confidence declined by 6 points, and is not at the same level as it was when the survey was conducted immediately following the aftermath of flooding last summer.

The mining industry displayed the highest confidence levels, whilst the weakest confidence levels were displayed in the construction sector.

NAB says that the sovereign debt crisis in Europe, as well as indications that the US economy could be headed for yet another slowdown is weighing on confidence of Australian companies, which is a little silly really given that the country is now firmly hitched to the Asian bandwagon.

Economy wide business conditions improved marginally in June, rising from 0 to 2.

There are however divergent conditions in different industries, with finance and property both displaying strong signs, as is recreation and personal services, unsurprisingly retail is not feeling very good about itself after being hammered by the internet over the last year.

Alan Oster, chief economist for NAB says weakness in business confidence and conditions as well as subdued demand from households implies that the central bank is likely to pause raising interest rates over the course of the next few months.

Mr. Oster expects at least a 25 basis point hike in the cash rate, though he now believes that hike will be deferred until December, with another 25 basis point hike in May next year, which would mean interest rates hitting a peak of 5.25 per cent.

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Despite multiple rate rises enacted by the Australian central bank, Last year November retail sales still managed to grow, all be it marginally by 0.3 per cent, which was in line with expectations.

According to the latest data released by the Australian Bureau of Statistics (ABS), November retail sales increased to a seasonally adjusted $20.328 billion, after a revised 0.8 per cent decline during October.

Analysts had forecast a 0.3 per cent rise in sales, seasonally adjusted.

Michael Blythe, chief economist of Commonwealth Bank of Australia said that whilst the rise in retail sales was positive, the data suggests that consumers, despite their rising income levels remain cautious.

“To get any rise at all in retail sales in November, given we had sort of a double-whammy rate rise, is probably not a bad result. Other parts of the consumer story still look pretty strong, motor vehicle sales are holding right up there at very high levels, so it’s a very patchy story. This will give the Reserve Bank some comfort. They were looking for consumer caution to continue and for any increase in income to be saved rather than spent. We’ve still got the next (rate) move up in April.” Mr. Blythe said.

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Australian banking major, and the nation’s largest mortgage lender CBA has joined the chorus warning that Australian households and businesses could face the prospect of higher interests, which could be tightened by the central bank as early as next month.

The Sydney based lender says it believes that the Reserve Bank of Australia (RBA) will hike official interest rates by 25 basis points when it meets on October 5th, which will mean that interest rates will stand at 4.5 per cent.

Over the last couple of weeks, the central bank has placed considerable emphasis on how quickly it expects the economy to grow over the next year, and has issued warnings that inflation was likely to rise if economic growth remained unchecked.

Michael Blythe, CBA’s chief economist says that a central bank decision to hike interest rates in October would be the first of a number of rate hikes which will be executed over the following months.

CBA is forecasting that official interest rates are likely to rise to 6 per cent by the end of 2011.

CBA joins its rival NAB and a raft of other economists, all of whom now believe that a central bank rate hike next month is inevitable.

“There is a lot of momentum building up in the economy at the moment, which suggests that rates will have to be raised. Especially given that the bullish commentary and overtones from the RBA, it sounds like they are priming the market that they are going to take the step and move rates,” Mr Blythe added. We think there is more to come after an October move as well. The big issues really for the RBA are the inflation risk and having an economy that is running close to full capacity.” Mr. Blythe said.

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Australia’s fourth largest bank NAB warned mortgage borrowers that they should be prepared for a hike in interest rates next month.

NAB says it now believes that the central bank will tighten interest rates by 25 basis points, lifting the official interest rate to 4.75 per cent when it meets on October 5th.

Not all analysts believe that rates will rise next month, but there is broad consensus that interest rates will be hiked before the end of the year. Alan Oster, chief economist from NAB said that the central bank’s tone in recent communication suggests that a rate hike is imminent.

“Until recently, RBA officials seemed to be signalling that interest rates were around average and growth was close to trend. There are now enough straws in the wind for us to believe that the tightening phase may well begin sooner, rather than later, and probably before the next inflation reading in later October.” Mr. Oster said.

Higher interest rates has prompted NAB to raise its forecast for the Australian dollar.

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No matter who ends up winning the upcoming Australian general election, the winner will undoubtedly have to take control of an economy growing at an above trend rate of 3.5 per cent.

According to the Westpac-Melbourne Institute leading index of economic activity which was released on Wednesday, the annualized growth rate during may was 6.7 per cent, much higher than the long term trend rate of 3.0 per cent.

The index is an indicator of the likely rate of economic activity for between three to nine months into the future.

Bill Evans chief economist of Westpac says that though there have been signs that the index has peaked, the index still suggests that there is a stronger outlook for growth during the near term than he was expecting.

Westpac is expecting an annualised growth pace of 3.5 per cent during the second half of 2010, slightly above trend of 3.25 per cent.

Despite the strong indicator, May was the second consecutive month where the rate of growth in the index had slowed.

“In absolute terms the growth rate remains remarkably high but it appears that growth in the index has peaked,” Mr Evans said.

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A new report authored by Commonwealth Bank suggests that whilst the job market is stronger, consumer spending is at its weakest level since the height of the global financial crisis.

The Commonwealth Bank Business Sales Indicator (BSI) fell by 0.3 per cent in trend terms in June after a similar decline in May. The decline over the last quarter is the worst result since the start of 2008.

Craig James, chief economist at CommSec, who wrote the BSI report, suggests that the chief reasons behind the decline were higher interest, doubts over the state of the global economy, rising utility charges and council rates, all of which were weighing on consumer minds.

“While we are hopeful about a lift in spending later in the year, future Reserve Bank (of Australia) rate decisions will be pivotal. Consumers feel as (if) they are under siege at present and they need a period of interest rate stability so they can focus on both the positive and negative influences on the household budget.” Mr. James wrote in the report on Tuesday.

During the last year in trend terms, the BSI has risen just 0.7 per cent, registering its slowest growth in 17 months.

The trend pace of growth has consistently slowed over the past seven months, exactly tracking the slowdown in the Australian Bureau of Statistics retail trade series, Mr James said.

In trend terms, the weakest sectors during June were telephone order providers, mail order, retail stores, and automobiles and vehicles.

The strongest gains registered in June in annual terms were personal service providers, amusement and entertainment.

The Commonwealth BSI is obtained by tracking the value of credit and debit card transactions processed through CBA merchant facilities.

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Growth in Western Australia is set to explode, with forecasts by the Western Australian chamber of commerce predicting 4.5 per cent growth in the current financial year, and a leap to 6 per cent in the following financial year.

The Chamber of Commerce and Industry says Western Australia has performed stronger than expected and this has prompted it to increase its growth rate for the 09/10 financial year from 3 per cent to 3.5 per cent.

John Nicolau, chief economist at the CCI says the state’s growth during the current financial year could reach as high as 4.5 per cent with all the sectors of the economy playing a value role in its development.

Mr. Nicolau expects the growth rate to hit 6.25 per cent during the 12/13 financial year, and growth would continue to be the story for the next half decade, rising slowly and steadily.

Mr. Nicolau added that economic growth in the state was largely built on increased investment by businesses, and robust consumer spending by households.

Growth in the state’s household consumption levels in the current financial year, will be driven primarily through population growth, as people migrate to the state to take advantage of business and job opportunities.

Exports is another large driver of economic growth, and is expected to increase by an eye popping 9.5 per cent during the next couple of years, and a further 10 per cent during 2012/2013.

Despite the rosy outlook for the state, some short term risks remain, in particular a flimsy recovery in the global economy as a results of the European sovereign default crisis.

The spectre of rising interest rates and costs of business has also had a negative impact on both business and consumer confidence during the June quarter, which may act to curtail growth in the next few months.

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Financial planners are fiercely opposing the proposal by the Cooper Review, which would ban commissions on insurance in superannuation, fearing that many clients will not be able to afford a fee which is charged upfront.

The Association of Financial Advisers has levelled the accusation against many of the proposals recommended by the review, which was conducted under the leadership of former Australian Securities & Investments Commission chairman Jeremy Cooper, of threatening the income of thousands of planners, by banning the practice of commission payments on all insurance products that are part of the super, including group risk and personal risk.

“Average mums and dads in Australia, they are going to struggle with this whole idea of being charged another fee,” AFA national president Jim Taggart said yesterday.
The Financial Planning Association lent its support to the AFA argument, suggesting that many in Australia either cannot afford or will not want to pay an upfront fee, which may amount to thousands of dollars due to the length of time and effort required to establish a policy.

Mark Rantall chief executive of the FPA says the proposal runs the real risk of lower income earners not being able to afford to buy insurance.

“They would love to do it, but they have a business to run at the end of the day,” he said.

Among its 174 recommendations, the Cooper review has called for the banning of commissions on all MySuper products and on any insurance offered as part of packages.
Despite the loud chorus against the proposal, some sections of the superannuation have come out in support of a ban on commissions for insurance sales.

Sacha Vidler the chief economist at Industry SuperNetwork, a group that represents industry super funds warned that should the government fail to adopt the proposal, that there is a risk that insurance commissions could be loaded up.

“If the government bans the commissions on the super product but doesn’t ban the commissions on the life (insurance) product, one option for the providers of those products is to load up the commissions on to the life insurance,” he said.

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As we all know, residential real estate in many countries such as the US, Europe, and some Asian countries shows signs of deteriorating price rises. Coupled with a slowing economy which gives less people the opportunity to buy into the market (or at least, pay a premium), this leads to asset depreciation. Its largely believed by investors that retail and commercial investing is immune to this effect. Unfortunately, each part of the real estate market is tied into the same business cycle, and like every other option in investing, nothing is the perfect hedge against economic recessions.

The retail real estate market has already started to slow. In the third quarter of 2007, 7.4 percent of retail space nationwide was vacant, according to Reis Inc. A vacancy rate of 7.4 percent isn’t tragic by any means. But it’s the highest level since 2002, and it’s up from 6.8 percent at the end of 2005. The third quarter of 2007 marked “the tenth consecutive quarter of flat or deteriorating retail occupancy at the national level,” noted Sam Chandan, chief economist at Reis Inc., in a recent report. Thanks to continuing growth in supply and flagging demand, there was about 140 million vacant square feet of retail space in the third quarter of 2007, up from 124.4 million vacant square feet at the end of 2006.

That’s a lot of wide open space, considering that on paper, retail hasn’t started to slow yet. My advice is this — be wary about investing in large REIT or other types of real estate funds. As Centrino found out, being over exposed to one type of asset can make it a difficult task to offload and free up extra cash flows.

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