Consumers unnerved by rate cuts

The latest Index of Consumer Sentiment report from the Westpac-Melbourne Institute shows a steep fall in consumer sentiment, down 5.5 per cent to 92.8 in October from 98.2 in September.

The figure is the lowest level of sentiment recorded since July 2015, and sits 8.7 index points below the long-run average of 101.5.

The national survey, conducted on 1,200 consumers around Australia between 30 September and 3 October 2019, showed that interest rate cuts – which usually serve to boost consumer confidence, particularly in the assessment of their own finances – have done little to offset consumers’ concerns with the larger global economy.

As such, the drop in consumer sentiment was largely driven by assessments of economic conditions, in both the short term (next 12 months) and long term (next five years), which recorded falls of 6.0 per cent and 9.1 per cent, respectively.

Additionally, the report shows that consumer expectations of their family finances, both current and future, are down from last month.

The sub-index describing ‘family finances now versus a year ago’ saw a fall of 4.9 per cent in October, and projections of ‘family finances next 12 months’ fell by 3.7 per cent.

In terms of property, consumer feelings towards purchasing property has dropped 5.4 per cent in October, a fall of 8.4 per cent from its August peak.

This downturn stemmed majorly from reduced buyer sentiment in Sydney and Melbourne, down 12 per cent and 14 per cent respectively since August.

The research suggests the dip in buyer sentiment could be linked to the fact that consumers across Australia now expect house prices to rise instead of fall, the first ‘net positive’ consensus since mid-2018.

The ‘house price expectations index’ rose a further 5.9 per cent in October, after a 3.4 per cent rise in September, to be up a total of 54.4 per cent since May this year.

Reflecting on the results of the report, Westpac chief economist Bill Evans suggested that the threat of a recession in the US and deteriorating trade relations between the US and China are affecting the global economy, and weighing on consumer sentiment.

Mr Evans specifies that on the week of the survey, the US share market fell by 2.6 per cent, and the Australian market was down 3.0 per cent.

Additionally, Mr Evans speculates that the act of cutting the official cash rate to record-lows has consumers even more nervous about the state of the global economy and the reality of a future descent into negative interest rates.

He anticipated that the RBA will hold off on dropping the cash rate again in November, however believes a further drop could take place in December, depending on developments in the labour market and the global economy.

Mr Evans said the results of the October Consumer Sentiment Index may highlight to the RBA the “unintended consequences” that could occur from resorting to negative interest rates.

[Related: Doubts cast over touted market rebound]