Index reports decline in sentiment
In a discouraging start to the new year, the Westpac Melbourne Institute Consumer Sentiment Index has declined by 1.3%, dropping from 82.1 in December to 81 in January.
The ongoing trend suggested that the challenges faced by consumers, particularly concerning the cost of living and high interest rates, continued to cast a shadow over economic sentiment.
“For consumers, the new year looks to have picked up where the old one left off: cost of living and high interest rates continuing to dominate and sentiment bumping around deeply pessimistic levels,” said Matthew Hassan (pictured above), Westpac senior economist.
The January reading placed consumer sentiment in the bottom 7% of all observations since the survey’s inception in the mid-1970s. Comparable levels of pessimism were last witnessed during the deep recession of the early 1990s.
Despite a notable easing in fears of interest rate hikes, with only 52% of consumers expecting an increase compared to 60% in December, the sentiment remains deeply pessimistic. This shift is attributed to various factors, including the lower-than-expected November monthly CPI indicator, indicating a slowing inflation rate of 4.3% year-on-year. Additionally, changing global interest rate expectations, notably the anticipation of rate cuts by the US Federal Reserve in the first half of 2024, have influenced consumer perceptions.
Interestingly, consumers in Australia appeared more “hawkish” on interest rate outlook than financial markets and economists. While more than half of consumers were expecting mortgage rates to rise, futures markets are pricing in 50 basis points in cuts by year-end, and three out of four economists anticipated a lower cash rate.
Sub-index details and economic concerns
Concerns continued to persist, however, especially among mortgage holders, with 60% of this subgroup preparing for rate increases.
“The sub-index detail suggests a modest boost from the less threatening interest rate outlook was more than offset by a further deterioration in family finances and rising concerns about the economy’s medium to longer term prospects,” Hassan said.
Family finances have come under renewed pressure, as the “finances compared to a year ago” sub-index dropped 7.6% to 63. This reversal undid most of the 11% improvement seen over the three months to December, with low- and middle-income brackets reporting the most significant deterioration.
The “economic outlook, next five years’” sub-index also took a hit, falling 6.1% to 89.1, primarily affecting younger age groups and those living in rental accommodation.
Despite the less threatening interest rate outlook, expectations for the year ahead showed only modest lifts in the “economic outlook, next 12 months” and “finances, next 12 months” sub-indexes, up 3.9% to 81.8 and 2.9% to 93 respectively, remaining below long-run average levels. However, sentiment across the mortgage belt saw a solid 5.3% lift.
The sub-index for "time to buy a major household item" stayed relatively stable, lingering at notably low levels and experiencing a slight dip to 78.
The Westpac Melbourne Institute Unemployment Expectations Index rose 1.4% in January to 130.7, with consumers in NSW appearing somewhat more optimistic compared to other major states, with an unemployment index reading of 126.4, contrasting with readings in the 131–138 range observed in other major states.
Housing-related sentiment indicated a gap between buyer sentiment and price expectations, as the “time to buy a dwelling” index fell 3.1% to 72, while the Index of House Price Expectations rose slightly by 0.5% to 158.1.
On Reserve Bank’s next move
The Reserve Bank board is set to meet on Feb. 5-6, with the continued weak consumer sentiment indicating that Australians remain under intense pressure from the rising cost of living, higher interest rates, and an increased tax burden on incomes.
The forthcoming quarterly CPI release in late January will play a crucial role in RBA’s policy decision in February.
“On balance, we expect the RBA to leave rates unchanged in February, and to be unlikely to raise rates further from here,” Hassan said. “However, a material upside surprise on inflation would make for a more finely balanced decision.”
To access the Westpac Melbourne Institute Unemployment Expectations Index report click here.
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