Consumer confidence plunges to recessionary levels: Westpac

Rising inflation and looming aggressive rate hikes has hammered consumer confidence down to recessionary levels, Westpac’s latest monthly survey has revealed.

Rising inflation and looming rate hikes has hammered consumer confidence down to recessionary levels, according to Westpac’s latest monthly survey. Picture: Getty Images

Surging inflation and the prospect of an aggressive series of rate hikes has hammered consumer confidence down to recessionary levels, Westpac’s latest monthly survey has revealed.

Westpac chief economist Bill Evans said “over the 46-year history of the survey, we have only seen index reads at or below this level during major economic dislocations”: during the height of the pandemic, the GFC, and in the severe downturns of the early 1990s, and in the mid and early 1980s. “Those last three episodes were associated with high inflation, rising interest rates, and a contracting economy – a mix that may be threatening to repeat,” Mr Evans said.

The survey of 1200 households was conducted from June 6-9, and so largely included the Reserve Bank’s 0.5 percentage point rate hike on June 7.

Westpac’s sentiment gauge fell by a larger-than-anticipated 4.5 per cent from to 86.4 points, from 90.4 in May. A reading below 100 points indicates more pessimists than optimists.

Mr Evans said “the survey detail shows a clear picture of a slump in sentiment being driven by rising inflation; an associated lift in interest rates; and a loss of confidence around the economic outlook, both here and abroad”. Six in 10 respondents talked about inflation, against an average one in 10, showing cost of living pressures had become “the dominant factor behind the thinking” of households.

More than 60 per cent of participants said they expected rates to go up by 1 percentage point over the coming year – versus 50 per cent a month earlier, and only 30 per cent in March.

With Australian workers’ real pay falling sharply over the year to March, Citi chief economist Josh Williamson said the Fair Work Commission’s decision on Wednesday to increase the minimum wage by 5.2 per cent could “place a temporary floor under consumer sentiment”, although it could also “reduce business confidence, particularly among small businesses in competitive industries”.

“Despite this collapse in consumer sentiment, Westpac is still constructive on the near-term outlook for consumer spending,” he said.

“The main drivers are a continued post-Covid reopening and the freeing-up of savings, with important support coming from strong labour markets.”

Reserve Bank governor Philip Lowe on Tuesday night said it was “reasonable” to expect the cash rate would reach 2.5 per cent “at some point”.

Mr Evans said he expected rates to rise from 0.85 per cent to 2.1 per cent by the end of the year, but that it would peak at 2.35 per cent in early 2023. He said it was the “right move” by the RBA to move quickly at the beginning, before treading more cautiously later as rates headed towards more restrictive levels.

Mr Evans said higher rates would drive real GDP growth from 4 per cent in 2022, to 2 per cent next year, and that inflation would similarly halve, from a high of 6.6 per cent this year to “a bit above” 3 per cent in late 2023.

“Next year will be a very slow year, but that is effectively what we need in order to achieve that slowdown in inflation,” he said. “And if we do achieve that, then we won’t see the Reserve Bank having to go to the sort of extent the market is expecting (of rates) well above 4 per cent next year.”

Originally published as Consumer confidence plunges to recessionary levels: Westpac