Spiking inflation, aggressive rate increases hammer consumer sentiment
Consumer confidence has dropped to recessionary levels, driven down by spiking inflation and an aggressive series of interest rate hikes by the Reserve Bank, according to data from Westpac’s latest monthly survey.
“Over the 46-year history of the survey, we have only seen index reads at or below this level during major economic dislocations,” Westpac chief economist Bill Evans said. Evans said the survey dipped to similar levels during the height of the pandemic, the Global Financial Crisis, the economic downturns of the early 1990s, and in the early and mid-1980s, The Australian reported.
“Those last three episodes were associated with high inflation, rising interest rates, and a contracting economy – a mix that may be threatening to repeat,” Evans said.
The survey polled 1,200 households and was conducted from June 6-9, and so included the RBA’s 0.5-percentage-point hike on June 07, The Australian reported. Westpac’s sentiment gauge fell by 4.5% to 86.4 points from 90.4 in May. A reading below 100 indicates more pessimism than optimism.
“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 in the economic outlook, both here and abroad,” Evans said.
Six in 10 respondents talked about inflation, showing that cost-of-living pressures had become “the dominant factor behind the thinking” of households, Evans said.
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More than 60% of respondents said they expected interest rates to rise by one percentage point over the coming year, The Australian reported. That’s up from 50% the previous month and only 30% in March.
Josh Williamson, chief economist for Citi, told The Australian that the Fair Work Commission’s Wednesday decision to lift the minimum wage by 5.2% could “place a temporary floor under consumer sentiment,” although the move could also “reduce business confidence, particularly among small businesses in competitive industries.”
RBA Governor Philip Lowe said Tuesday that it was “reasonable” to expect the cash rate to hit 2.5% “at some point.” Evans said he expected the rate to hit 2.1% by the end of the year, but predicted it will peak at 2.35% in early 2023.
Evans said it was the “right move” for the RBA to move quickly now before being more cautious later as rates head toward more restrictive levels, The Australian reported.
