Economic Gloom Sets Alarm Bells Ringing

There are worrying signs that the strength of the economy may falter next year, as consumer sentiment fell for the third consecutive month and the long-awaited housing recovery failed to materialise.

Consumer spending and a rise in home building were expected to help drive economic growth further next year, but the latest figures show both are wavering.

The latest Westpac-Melbourne Institute survey of consumer confidence fell 2 per cent in December, with people concerned that the Asian currency crisis will mean tough times at home.

People believe the economic outlook during the next five years is worse, and the number planning to make a major household purchase in the next few months has fallen to its lowest level for the year.

Westpac's general manager of economics, Mr Bill Evans, said the result was surprising as consumer spending spiked up 5 per cent over the past year, and there was anecdotal evidence of a booming Christmas to come. "This may be an early warning that the current surge in retail spending will have difficulty in being sustained through 1998," he said.

Consumer spending accounts for around 60 per cent of national income, and has been a key driver of growth in the past six months. Mr Evans said consumers surveyed had remembered the overwhelmingly negative news on overseas economic conditions, which had affected their expectations.

There was a glimmer of hope as those surveyed expected Australia's high rate of unemployment to begin to fall, although most people believed unemployment would remain high.

However unemployment expectations are the best they have been since mid-1996, and the Department of Employment jobs indicator, also released yesterday, showed these hopes were well founded, with the index rising in October, pointing to an improvement in the jobs market.

Meanwhile, Bureau of Statistics figures on home loan approvals remained flat in October, rising just 0.4 per cent, up 3 per cent over the past year.

Approvals for new homes, the best indicator of future economic activity, fell by 5 per cent in the month, wiping out gains made in September.

Bankers Trust chief economist and housing expert, Dr Chris Caton, said the figures gave no signal of an acceleration in home building, although he remained optimistic of a future pick-up.

"The housing recovery continues to make forward progress, but at a rate that occasionally verges on the glacial," he said.

"It remains our view that, given the extraordinarily high level of affordability, the recovery will continue, and probably even accelerate."

First home-buyers are tentatively re-entering the market, after the market fell to a six-year low in August this year.

Banks have continued to win back home loan customers from mortgage originators, like Aussie Home Loans, securing 82 per cent of the market, compared to a low point of 78 per cent in June.

But there was a silver lining with the value of home loan approvals reaching a record high of $4.6 billion, as the average value of a home loan rose from $112,650 to $113,210.

NSW home loan approvals have continued to perform poorly, falling slightly in October, and up 4 per cent over the past year.

The chief economist with Citibank, Mr Stephen Koukoulas, said recent business surveys also confirmed that economic growth would slow in the middle of next year.