Consumer sentiment falls further than expected

Consumer sentiment fell by 2.4% in March as Federal Budget concerns, rising petrol prices and the carbon tax proposals hit confidence.

The Westpac-Melbourne Institute Index of Consumer Confidence fell from 106.6 in February to 104.1 in March, making it the lowest index reading since June 2010.

Westpac chief economist Bill Evans says while there is no specific evidence, it’s believed the drop is due to government proposals for a flood levy and a carbon tax.

Meanwhile, households are “particularly negative” on the outlook for family finances over the next 12 months, with pessimists outnumbering optimists for the first time since March 2009 when it was feared Australia was in recession.

“Respondents’ assessments of their finances relative to a year ago remain deeply pessimistic, with this index falling by another 1.6% to be down by 12.1% on a year ago,” Evans says.

“We have to look back to early 2008, prior to the advent of the global financial crisis, to see the last time optimists outnumbered pessimists on this particular assessment.”

Evans says spending intentions also deteriorated in this survey, stating: “The component measuring whether now is a good time to buy a major household item fell by 4.8%.”

Evans says despite the decline, optimists remain dominant partly because of the high Australian dollar, which has allowed significant discounting of imported retail items.

“The news was better for general assessments of the economy. The outlook for economic conditions over the next 12 months improved by 5.7%, although the five-year outlook fell by 2.9%,” Evans says.

Evans says as consumers become increasingly concerned about their finances, there has been an increase in their preferences to pay down debt at the expense of investments in real estate or shares.

“In this survey, the proportion of respondents reporting ‘pay down debt’ as the wisest place for savings increased from 21.7% in December to 22.6% in March,” he says.

Evans says the Reserve Bank of Australia will focus on the mining boom and terms of trade at its next meeting on April 5, but consumer sentiment will also be taken into account.

“Evidence from this report that consumer sentiment is at its lowest level since June 2010, and households are particularly concerned about their own finances, enforces the theme of a cautious consumer and provides the [Reserve] Bank with ample scope to observe developments,” he says.

“There is little chance of a rate move in April, with the next increase not likely to occur before the September quarter.”