Consumers cautious before budget; Wage growth eaten into by debt repayments, cost of staples, job fears, slow housing market, ANZ says

Consumers remained cautious and reluctant to open their wallets in May as they continued to view current economic conditions in a negative light, the latest ANZ Roy Morgan consumer confidence survey shows.

Rising wage growth was a support for consumer spending, but this was being eaten into by deleveraging as households sought to pay down debt, the rising cost of staple items, job uncertainty and a housing market shuffling sideways.

The survey comes before the government delivers its election year budget at 2pm tomorrow, which will have no additional nominal spending from last year, and spending cuts to areas other than Health, Education and Justice. Commentators are calling the budget the bleakest since Ruth Richardson's 'Mother of all budgets' in 1991, although Prime Minister John Key said this week Treasury is forecasting strong jobs growth and wages growth "well and truly" above inflation over the next few years.

The broader measure of consumer confidence in the survey rose two points to 103.3 in May, ANZ chief economist Cameron Bagrie said. A figure over 100 indicates optimism, while a figure below 100 indicates pessimism. However the upward movement was well within the monthly volatility of the survey, with the underlying message one of subdued consumer confidence, Bagrie said.

Meanwhile the survey's current conditions index fell two points to 91.5.

"A net 26% of consumers still feel worse off relative to last year. This is five percentage points weaker than in April, with the net balance in negative territory since March 2008. Conversely, perceptions on whether it was a good time to buy a major household item lifted marginally (from +8 to +9). The aggregate level of current sentiment remains low and continues to suggest a large element of caution on the part of consumers," Bagrie said.

'Future looking brighter, but house price growth anaemic'

Against the backdrop of an easing in current conditions, the Future Expectations component rose from 106.6 to 111.2, Bagrie said.

"The rise was underpinned by modest rises in household’s financial wellbeing a year out, the general economy over the year ahead and New Zealand as a whole over the next five years," he said.

The overall message from the consumer confidence numbers was unchanged as households remained cautious towards spending and how they perceived the economy was evolving.

"We can see elements of clear support for spending to begin diffusing through the economy via labour income growth and high commodity export prices," Bagrie said.

"Income growth has been solid, with average gross weekly earnings up 4.6% over the March 2011 year. However, such support is facing headwinds from the deleveraging backdrop, rising cost of staples, job uncertainty and a sideways housing market," he said.

"Looking at the pricing gauges, household’s 2-year ahead inflation expectations and house price expectations eased. The former dropped 0.5 percentage points and the latter 0.2 percentage points. While such measures are not what we consider direct inflationary barometers, they imply little signs of rising wage expectations (an indirect inflation channel) or housing market sentiment."