13 Feb 2019
Apart from a common sense correlation with consumption of goods and services, credit card spending data have historically been a pretty good barometer of the economic mood.
“In Australia, there have been seven Prime Ministers over the last 20 years; New Zealand has had four.”
This was particularly so when credit cards were primarily used for higher priced discretionary items – when people were buying fridges and TVs they were typically more optimistic.
Credit cards today, thanks to tap-and-go in particular, are well and truly in the realm of everyday transactions. So does a correlation still exist between credit card use, personal debt and the underlying mood?
Using central bank data and MWE Consulting’s research, we compared Australia, which has been broadly pessimistic in recent years, and New Zealand where the mood has been more buoyant (Although of course this economic analysis doesn’t include the impacts of the recent atrocities in Christchurch).
For this analysis, our starting point was 2007, just before the global financial crisis (GFC) rattled almost all developed countries.
Consumer sentiment is tracked in New Zealand by the ANZ-Roy Morgan NZ Consumer Confidence Index and in Australia by the Westpac-Melbourne Institute Consumer Sentiment Index. A consumer sentiment index greater than 100 indicates the presence of more optimism than pessimism.
Not surprisingly, the indices in both markets tumbled after the GFC although in New Zealand sentiment only fleetingly dipped below 100 compared with the more chronic pessimism in Australia.
Over the last 11 years, the data is notable in that:
Between 2007 and 2010, the indices in both markets moved almost in parallel (there may well be differences in survey methodologies that explain some or all of the differences in the absolute index results but the trends hold). However, since 2010 the indices have moved in a quite markedly different manner with the Kiwis being decidedly more upbeat.
So what impacts the mood of a nation? And is propensity to spend on credit still a reliable indicator?
In general, Australia and New Zealand are not that different (apologies to both sides of the ditch).
Consumers are generally wary of volatility and uncertainty. Confidence is linked to factors including employment, asset values, political direction, and access to health services. In summary, an expectation of ongoing future opportunities and aspirations towards a desired lifestyle.
In Australia, the data suggest some diminution of these expectations relative to New Zealand – despite Australians enjoying a higher average per capita income and, currently, a lower rate of unemployment. It appears there are other issues leading to the disparity in sentiment.
Susceptible to volatility
Non-housing personal debt - considered more susceptible to volatility than home mortgage lending - took a hit as the GFC sent shock waves around the world.
In Australia, personal lending only returned to the 2007 dollar figure in 2015 but has since fallen back to 2.4 per cent below 2007. The New Zealand market reported a similar hit to personal lending but returned to the 2007 level by 2014 and is now 24 per cent above the level of 11 years ago.
Not only that, it is increasing at a robust rate compared with a flat pattern and subsequent slow decline in recent years in Australia.
Given the apparent a link between sentiment and propensity to borrow, MWE looked at what has been happening to credit card use in both markets.
Our hypothesis is the mood of a nation will influence behaviour, in particular discretionary spend and borrowing patterns. Australia was a rarity in avoiding recession in the GFC; New Zealand wasn’t spared. Growth in credit card spend plunged in both markets, in New Zealand moving into negative territory.
The recovery in growth in card spend was similar in both markets and continued at comparable rates until around 2014. Since then, the annual growth in credit card spend in Australia has trended lower to around 3 per cent whereas in New Zealand it has consistently been increasing at more than twice this rate.
It’s a reasonable assumption consumer sentiment leads personal debt expansion. Absent a recession, when people may well borrow to stay afloat, discretionary borrowing reflects the confidence of better times ahead. Typically this confidence is affected by several factors.
Both countries have been trading in an increasingly global economy influenced by services and technology. In Australia, the impact has been quite profound with major structural shifts in relatively short periods. If we look at the last 10 years, the ABS reports the total workforce increased by 17 per cent but that disguises stresses caused by significant shifts in composition.
Some traditional categories such as manufacturing and agriculture saw employee numbers decline by 8 per cent and 7 per cent respectively, some such as retail were static and some saw huge growth. These included healthcare and social assistance up 54 per cent, mining up 43 per cent, professional, scientific and technical services up 39 per cent, arts and recreation up 30 per cent, education and training and public administration and safety both up 25 per cent and accommodation and food services up 22 per cent.
In New Zealand, there have also been structural changes but they have been less dramatic. The increase in workforce numbers at 21 per cent over the last 10 years was somewhat above the growth in Australia; there was not an automotive manufacturing industry and associated support suppliers to disappear; the mining industry is 0.5 per cent of the workforce compared with 2.0 per cent in Australia and even the declining agriculture segment accounts for about a quarter of the share it has in Australia. Overall, the split of employees in the major segments has barely moved over the last 10 years in New Zealand with around 73 per cent in services, 20 per cent in industry and 6 per cent in agriculture.
Notwithstanding the growing cynicism of politicians, to say there has been a marked difference in the political life of the two counties of late is hardly an exaggeration.
In Australia, there have been seven Prime Ministers over the last 20 years; New Zealand has had four. Between 2010 and 2018, Australia had six Prime Ministers, New Zealand three.
However, the number of Prime Ministers is just part of the story with the manner in which the terms of elected political leaders have been truncated in Australia at odds with the measured changes of leadership in New Zealand.
Whether it be changing prime ministers, intra-party warfare, social disputes or other issues, Australia has enjoyed considerably more social and political tension than New Zealand.
Australia has also lagged behind New Zealand on gender equality. The World Economic Forum released its Global Gender Gap Report in December 2018. In the overall ranking, New Zealand improved to number 9 of the 149 whilst Australia slipped to number 39.
The report noted "Australia at 39 records a slight widening of its gender gap on legislators, senior officials and managers as well as some reversal of progress on wage equality, resulting in a slight drop in rank," while New Zealand at 9 maintains their overall Index top 10 rankings on the back of strong scores on closing the political empowerment gender gap." Those forces don’t appear to be shifting significantly.”
There is a growing body of research linking workplace diversity with superior economic growth.
Australia’s annualised Consumer Sentiment index did however move higher through 2018 to be a little over the 100 mark as 2019 kicked off. While underlying sentiment in Australia is presently heading higher, the opposite is the case in New Zealand. We do however note the monthly index in January 2019 suffered a substantial fall from December 2018 to drop below 100.
The short to medium term is therefore unlikely to see growth in non-housing personal debt in Australia come close to the rate at which it has been increasing in New Zealand.
The evidence clearly indicates a critical key to getting commerce growing, entrepreneurial flair flourishing, growth in consumer spend and an appetite for personal borrowing is to improve the mood of the population. Our analysis of the relationship between consumer sentiment and credit card spend and balances shows that behavioural change typically lags sentiment change by around nine months.
So from our perspective as credit analysts, what is the data telling us?
Does mood lead or lag sentiment? Can we look at our data and forecast an improvement in happiness? Or can we look at mood and predict an increase in borrowing. What are the lessons from our analysis?
Mike Ebstein is Founder & Principal at MWE Consulting
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
13 Feb 2019
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