Consumer sentiment creeps towards recessionary levels

The latest report by Westpac economists found consumer sentiment fell 4.4 per cent in June to 86.4 that was “nearing the global financial crisis lows”.

The Westpac Melbourne Institute Consumer Sentiment said the fall was driven by an increase in inflation, a rising cash rate now at 0.85 per cent and a loss of confidence around the economic outlook, both domestically and internationally.

Over the 46-year history of the survey, chief economist at Westpac Bill Evans said the index had only reached this level during “major economic dislocations”.

For example, during COVID-19 sentiment reached 75.6; the global financial crisis hit 79.0; early 1990s recession (64.6); the mid-1980s slowdown (78.7) and the early 1980s recession reached 75.5.

“Those last three episodes were associated with high inflation; rising interest rates; and a contracting economy – a mix that may be threatening to repeat,” he said.

The survey noted the highest recall in June was around news on inflation, with 60 per cent of respondents observing news on this topic, compared to 43 per cent for “economic conditions” and 24 per cent for “interest rates”.

With rising inflation driving an increase in the cost of living for Australians, Mr Evans said this was a “particularly high” level of recall for inflation news.

Similarly, Commonwealth Bank reported its “worst reading” since February 2009 at 86.4 index points in June, with four of the five subindices dropping.

As mortgage holders face higher repayments, the economic insights report stated mortgage holder sentiment dropped 7.3 per cent, well below the long-term average.

The biggest fall was for “family finances next 12 months” that was down 7.6 per cent in the month to 86.2.

While the “anticipated economic conditions” subindex fell for the next year down 7.2 per cent, it saw an improvement of 2.1 per cent looking ahead for the next five years.

“We believe the RBA will get a lot of mileage out of its previous and forthcoming interest rate increases,” associate economist Harry Ottley said.

Despite the pessimistic consumer sentiment, the survey reported there had not been a “significant slowdown” in spending with internal debit and credit data showing tentative signs of softening occurring, but remained elevated.

“We would expect these poor consumer sentiment figures and rising interest rates to dampen spending throughout the second half of 2022,” Mr Ottley said.

Across the major states confidence was down sharply in NSW, Victoria, South Australia and Western Australia, while it remained virtually unchanged in Queensland, according to the latest ANZ and Roy Morgan’s Consumer Confidence Index.

The survey reported consumer confidence dipped 7.6 per cent last week to 12 June, after a 4.1 per cent fall the week before taking the four-week average to 87.2.

ANZ’s head of Australian economics David Plank said Australians who expect “good times” for the economy over the next five years had dropped to 10 per cent – its lowest level on record and noted a 14.4 per cent drop in Australians prioritising “time to buy a major household item”.

Mr Plank said the RBA will be “looking closely” to see whether this divergence can continue.

[Related: Borrower sentiment falling as inflation soars: ANZ]