Consumers to face challenges: economist

One of the world's largest financial institutions says Australia will be feeling the
brunt of the global recession for some time yet.
The Sydney branch of JP Morgan says while the economy has so far not entered a
technical recession - two consecutive quarters of negative gross domestic product
(GDP) - all the symptoms of a recession are in place.
Unemployment is rising, workers' hours have been slashed, wage growth is slowing and
the decline in corporate profits is driving a collapse in business investment, it
says.
"The Australian economy is in recession ... although it has fared better than other
developed economies, it will exit this recession later," JP Morgan economist Helen
Kevans said in a research note.
She said the fading impact of cash handouts from the federal government will be felt
in the second half of this year. This will amplify challenges facing the consumer
stemming from rising unemployment, softer wage growth, rising mortgage rates and
higher petrol prices.
"The lingering drags of previous wealth losses from weak equity markets and falls in
house prices also will be a burden," she said.
Consumers have already re-evaluated their spending with credit card balances falling
for the first time in more than 14 years, as households cut spending and begin to
repay outstanding debt, she said.
New official data released on Monday showed that households are reluctant to take on
new loans in the current economic environment, unless it is to buy a new home.
The Australian Bureau of Statistics said the value of personal loans fell by a
seasonally-adjusted 2.9 per cent in May compared with April, to $6.03 billion. This
is the lowest amount since November 2005.
However, the value of home loans in the same month rose 2.3 per cent, to a record
$17.05 billion.
Demand for mortgages has picked up sharply since last October due to low interest
rates and a record influx of first-time home buyers because of a more generous grant
from the federal government.
Reserve Bank of Australia (RBA) governor Glenn Stevens reiterated last week that the
central bank has scope to cut the official cash rate again, if needed, with the rate
of inflation in decline.
The central bank left the cash rate at a 49-year low of 3.0 per cent for the third
consecutive month after last week's monthly board meeting.
It had cut the rate by a hefty 425 basis points between September last year and April.
However, mortgage broker Loan Market Group has warned that homeowners are unlikely
to gain any benefit from another cut in the cash rate and may even face higher
mortgage rates.
Loan Market Group executive director John Kolenda says that while there are
predictions of a further easing by the RBA, there is evidence that major banks will
no longer be moving in line with any changes.
"There is ... a strong likelihood banks will not pass on part or all of any future
RBA rate cuts," he said in a statement on Monday.
As it is, retail banks have only passed on some 385 basis points of the RBA's rate
reductions because of their own increased funding costs.
Last month the Commonwealth Bank of Australia broke ranks by raising its variable
mortgage rate by 10 basis points because of increased funding costs.
Still, there was some much needed good news for businesses in the country's biggest
state economy.
The NSW Business Chamber Business Conditions Survey has found 30 per cent of
businesses expect better conditions in the coming three months and only 23 per cent
think circumstances will get worse.
"There are reasons to hope that the recession might not be as deep or as prolonged
in NSW," the chamber's chief executive Stephen Cartwright said in a statement.
"It is clear that the federal budget's economic stimulus package has acted as a
circuit breaker in terms of declining confidence."
The National Australia Bank will release its monthly nationwide business survey on
Tuesday.