Consumer sentiment increases but rate cut still on the cards

The Westpac Melbourne Institute Index of Consumer Sentiment increased by 0.3% in June, but Westpac chief economist Bill Evans has dismissed the increase as another “disappointing” result.

Consumer sentiment increased from 95.3 points in May to 95.6 points in June, the index shows. But according to Evans, the result is disappointing in light of the latest interest rate cut.

“It follows a second consecutive cut in the official cash rate by the Reserve Bank,” Evans says.

The index shows sentiment has risen just 1.1% from its April level, remaining 1.7% below the level recorded in October last year, despite a cash rate reduction of 125 basis points.

“Clearly, other factors are dominating rates in the minds of consumers – those factors are concerns about the domestic economy and international conditions,” Evans says.

The June survey included additional questions on “news” categories recalled, and whether news was interpreted as favourable or unfavourable.

The results show negative news around the economy and international conditions dominated. By far the highest recall was on news about “economic conditions” (67.1% of respondents) and “international conditions” (40.4%).

“The recall level on economic news was the highest since 2009 and roughly double that of news items on ‘interest rates’ (31.8%) and ‘budget and taxation’ (34.7%),” Evans says.

“The recall on ‘international conditions’ was second only to the record high registered in December last year.”

Evans says consumers continue to view news on both “economic” and “international” conditions as very unfavourable, with the latter deteriorating sharply since March.

Across the five sub-indexes of consumer sentiment, two improved and three deteriorated.

Lower interest rates saw a solid rise in the sub-index tracking responses on “family finances vs. a year ago” (up 4.6%), and “time to buy a major household item” (up 7.5%).

“However, June saw a significant deterioration in the sub-index tracking consumers’ forward views on their family finances (down 7.7%),” Evans says.

Meanwhile, responses to questions on “time to buy a dwelling” and “time to buy a car” both showed an improvement in June, with these indexes rising 8.2% and 7.5% respectively.

“Lower interest rates and lower prices are clearly improving affordability and buyer sentiment on both fronts although… there are concerns about the economic outlook,” Evans says.

Westpac is tipping another interest rate cut when the Reserve Bank board next meets on July 3.

“Evidence from today’s survey confirms the fragility of confidence and the critical role played by the global economic situation in impacting confidence,” Evans says.

“However, with the surprisingly strong GDP print for the March quarter, the board may choose to delay the next move until after the next inflation report due out on July 25.”

“At this stage, we are comfortable in maintaining the July call while emphasising that the case for an eventual cash rate of 2.75% remains robust.”