Westpac calls falls in sentiment troubling

Rate cuts and tax relief fail to stop key index of consumer sentiment hitting two-year low.

Westpac says the fall in consumer sentiment comes despite rate cuts and tax relief. Picture: Hollie Adams

Interest rate cuts and the prospect of tax relief have failed to buoy consumer sentiment, in what Westpac calls a “troubling” development.

The Westpac-Melbourne Institute of Consumer Sentiment index fell 4.1 per cent to a two-year low in July, according to figures released today.

The index fell to 96.5 index points in July, down from 100.7 in June.

“The fall in sentiment this month is troubling as it comes against what should have been a supportive backdrop for confidence,” said Westpac senior economist Matthew Hassan.

“The last month has seen a further 25 basis point interest rate cut from the RBA, the federal government’s tax package pass through parliament, more signs that the Sydney and Melbourne housing markets are stabilising and even some more improvement in the US-China trade dispute,” he said.

“Despite these positives, Australian consumer confidence has fallen to a two-year low.”

The poor showing follows yesterday’s NAB monthly business survey, which showed a post-election bounce in business confidence was short-lived, despite interest rate cuts.

Westpac said the main driver for the fall in consumer sentiment was concerns about the outlook for Australia’s economy, as well as prospects for family finances, with the biggest decline seen in the subindex tracking expectations for the economy over next 12 months.

That slumped 12.3 per cent to its lowest level in four years.

Longer-term expectations for the economy were also firmly lower, with the sub index for the economy over the next five years dropping 6.7 per cent.

“Deteriorating expectations for the economy outweighed any near-term support from the prospect of lower interest rates and tax relief,” Mr Hassan said.

“The subindex tracking consumers’ expectations for ‘finances, next 12 months’ also recorded a sharp 8 per cent fall, moving back into net pessimistic territory for the first time since late 2017.”

Responses over the survey week showed that the Reserve Bank’s July rate cut had virtually no effect on sentiment, with mortgage holders recording a 3.3 per cent decline in sentiment for the month.

Sentiment among middle income earners fell 5.5 per cent.

In regional NSW, where drought conditions had intensified, sentiment tumbled 14 per cent.

Meanwhile sentiment among tradies dropped 7.6 per cent, which Mr Hassan said suggests the residential construction downturn may be starting to weigh more heavily on some households.

“Increasing concern about the economy is undermining consumers’ sense of job security,” Mr Hassan said.

Expectations showed a sharper deterioration in NSW, Victoria and Western Australia.

Westpac’s sentiment index showed that consumers thought it was the right time to buy a dwelling, the subindex lifting to its first-above trend reading in four-and-a-half years, up 5.4 per cent to 123.2 index points for July and up 19.5 per cent on a year ago.

House price expectations rose 8.9 per cent after a 22.7 per cent rise last month.

Despite the lacklustre sentiment outlook, consumer views around current conditions were better supported, with the subindex measuring finances compared to a year ago lifting to a 3 per cent to a five-month high though it still remained weak at 85.7 index points.

Attitudes towards spending improved slightly, with the ‘time to buy a major household item’ subindex lifting 3.6 per cent.

“This will be of some relief given that consumer views around current conditions tend to be a better guide to current spending activity,” Mr Hassan said.

“However, that support could fade quickly if weaker expectations for near term prospects are realised.”

The index recorded a 5.8 per cent rise in unemployment expectations, well above the long run average.

Westpac said it expects the Reserve Bank to leave the cash rate on hold in August before further easing later in the year.