Confidence tumbles on surprise RBA rate hike and ‘mildly disappointing’ budget

Westpac’s latest survey points to a sharp slowdown as consumer confidence plunges back to recessionary levels led by renters and low-income households.

A surprise Reserve Bank rate hike and a “mildly disappointing” federal budget sent consumer confidence tumbling back towards recessionary levels in May, with nearly seven in 10 households expecting more mortgage pain in the coming 12 months.

Westpac’s latest survey revealed an 8 per cent drop in the bank’s consumer sentiment index, mostly reversing a sharp improvement in the previous month.

Westpac chief economist Bill Evans said “the index has fallen back to just above the dismal levels seen back in March, which recorded the lowest monthly read since the Covid outbreak in 2020 and, before that, since the deep recession of the early 1990s”.

“The entrenched pessimism is clearly reflecting intense pressure on household disposable incomes resulting from high inflation and the sharp rise in interest rates. This signal is apparent in actual activity with a range of spending indicators now pointing to a sharp slowdown,” Mr Evans said.

“On the other hand, the survey continues to show resilience around labour market conditions and signs of renewed confidence in the housing market. Both were cited in the (RBA) board’s surprise decision to raise rates in May,” he said.

While “interest rates were again a key driver of the May survey”, Mr Evans said renters reported a bigger fall in confidence than mortgagors, at 13 per cent versus 10 per cent for indebted homeowners.

This result “highlights the extent to which tight rental markets and surging rents are putting intense pressure on a group that makes up around 30 per cent of households,” he said.

Mr Evans said disappointment around Labor’s second budget – which included $13.6bn in cost of living relief aimed at vulnerable households, including power bill relief and boosts to rent assistance and the dole – accounted for more than half of the month’s hit to confidence, based on sample responses before and after budget night.

But he said that was probably too “harsh”, and that the gap between the 15.5 per cent of respondents who said they expected the budget to improve their finances, versus the 27 per cent who expected to be worse off, was narrower than previous budgets.

“Viewed against history, the 2023 ‘gap’ of 11.5 per cent is much less unfavourable than that of the previous budget in October (28 per cent) and is only bettered by one budget in the 2010-19 period – the 2018 budget that announced a major series of income tax cuts and saw a ‘gap’ of just 9.1 per cent.

“This historical comparison, and the clear inflation-related limitations on policy suggest the Federal government should be satisfied with the consumer response to this year’s budget.”

Among the most remarkable findings in the survey was an 11 per cent jump in the index tracking house price expectations to 144 points – the highest since February last year and suggesting property market optimists outnumber pessimists four to one, despite 70 per cent of respondents predicting further rate rises over the coming 12 months.