Consumer sentiment plunges amid carbon tax and rates fears

Consumer sentiment has hit a two-year low as concerns escalate about the European financial crisis, the ongoing impact of interest rate rises and the carbon tax.

The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 8.3%, from 101.2 points in June to 92.8 points in July. Westpac chief economist Bill Evans says the result is surprisingly weak.

“The only other time in recent history when the index has been sustained around the current level was during the period following the GST introduction, which coincided with the bursting of the dotcom bubble,” Evans says.

“A combination of concerns – over the European financial crisis, the ongoing impact of the seven interest rate hikes between October 2009 and November 2010 and uncertainty about the introduction of a price on carbon – are now really undermining the confidence of consumers.

“We have seen 11 falls of this magnitude since the early 1990s recession but only two of them have been from a lower starting point.”

The report reveals that the largest decline in consumer sentiment was in the highest income group, where confidence plunged by 11.1%.

“Of course the government’s compensation package associated with the introduction of a price on carbon is least generous for those in the upper income brackets,” Evans says.

“Secondly, the confidence of those folks who have a mortgage plummeted by 16.5%. Despite the Reserve Bank keeping rates on hold following the board meeting in July the bank has persisted with its strongly hawkish rhetoric.

“This is continuing to undermine confidence among households who it would appear are incredulous that such a policy is favoured given the current circumstances.”

According to the report the index that tracks views on the economic outlook over the next 12 months fell by 13.5%, while the index tracking the five-year outlook was down by 10.2%.

The index tracking views on whether now is a good time to buy a major household item was down by 9.5%.

There was one positive aspect to the survey – confidence in housing picked up by 3.3%, with the index now at its highest level since January 2010.

“Nevertheless these conditions will hardly be conducive to the Reserve Bank raising rates … we do not expect to see a change in rates for the remainder of this year,” Evans says.

The report comes on the back of a business sentiment survey by NAB, which shows business confidence deteriorated sharply in June.

“Conditions in retail fell to worryingly low levels while manufacturing, construction and wholesale were again poor,” the report says.

“The high Australian dollar, continued cautiousness of households and concerns about the global outlook appear to be eroding sentiment, with weak confidence reported in construction, manufacturing, retail and wholesale.

“While conditions were weaker in mining the outlook remains strong, as reflected in high confidence levels. Overall the gap between weak and strong industries is reaching historical highs. This largely reflects weakening in the poor performers.”