Consumer sentiment falls 8.3% in December

Consumer sentiment fell by 8.3% in December, its lowest level since August this year.

The Westpac Melbourne Institute Index of Consumer Sentiment index now sits at 94.7 points, down from 103.4 points in November.

“The index has now fallen to its lowest level since August… when respondents were concerned that the Reserve Bank was preparing to raise interest rates,” Westpac chief economist Bill Evans says.

“On face value, it should be a surprise that the index has not risen following a second rate cut from the Reserve Bank.”

“However, the history of previous easing cycles shows that rate cuts do not guarantee an improvement in sentiment.”

“The likely explanation is that respondents’ concerns over the reason behind the rate cut may overwhelm the perceived benefits of the cut itself.”

For this survey, Evans says respondents were asked questions about certain news items, as they relate to the economy, and whether these items are perceived positively or negatively.

“News on interest rates was recalled by 31.5% of respondents, whereas economic conditions attracted the attention of 60%, international conditions 55.6%, and [Federal] Budget and taxation 36.9%,” Evans says.

“The news on economic conditions, international conditions, and [the] budget and taxation was considered the most negative since 2008-09.”

Evans says respondents may also have been unnerved by the reported increase in the unemployment rate, from 5.2% to 5.3%, representing a loss of 40,000 fulltime jobs.

“Of course, the constant stream of news on developments in Europe is also likely to have impacted respondents,” he says.

Risk aversion increased markedly in this survey. When asked about “the wisest place for savings”, 26.6% of respondents nominated “paying down debt”, up from 18.7% in September.

“So far, that high level of risk aversion and associated rise in the savings rate has not unduly constrained consumer spending due to strong income labour growth,” Evans says.

“Evidence from a weakening labour market is pointing to a slowdown in income growth, which is likely to be associated with a softening of spending if savings rates do indeed remain high.”

“That dynamic will have to feed into the [Reserve] Bank’s growth outlook… We continue to expect that the board will decide to further cut rates at its upcoming meeting on February 7.”