Consumer sentiment falls sharply in May


Rate rises and Budget uncertainty have seen the Consumer Sentiment Index fall by 7 percent in May

Consumer sentiment falls sharply in May
Consumer sentiment falls sharply in May
May 19, 2010

Rate rises and uncertainty over the Budget have seen the WestpacMelbourne Institute Consumer Sentiment Index fall by 7 percent in May, down from 116.1 in April to 108.

Due to the timing of the survey – which was conducted after the release of last week’s Budget – respondents were asked how federal spending would impact family finances over the next 12 months.

Most respondents (51 percent) indicated the Budget would have little impact; 27 percent indicated their finances would worsen as a result of the Budget; while only 11 percent said they would improve; and 10 percent 'didn't know'

Westpac's Chief Economist Bill Evans says the 7 percent fall in consumer sentiment indicates the response to the Budget was negative on balance.

However, he says the bank expects the most important factor causing such a large fall in the headline index was the 25pp rate hike.

"We have written in the past about sensitivity points for mortgage rates above which Sentiment can be damaged quite substantially," Evans explains.

"The most recent rate increase has pushed the variable mortgage rate from 7.15 percent to 7.4 percent. We are clearly back in that range for the variable mortgage rate where future rate hikes are going to hurt consumers and the Index can be expected to respond accordingly," he says.

Confidence of respondents with a mortgage fell by 8.1 percent in May compared with average falls of only 2.3 percent in response to the five previous rate hikes.

‘GLOBAL ECONOMIC NERVOUSNESS’

Further evidence of the impact of rising interest rates comes from the Time to Buy a Dwelling Index, which shows prospects for the housing market are deteriorating.

In May the Index has fallen by 15.4 percent to 88.2 which is 35.6 percent below its long run average.

According to Evans, other factors which usually influence respondents were also weak.

"The re-emergence of global economic nervousness would clearly also be weighing on respondents. Since the last survey the share price Index has fallen by 6.8 percent while the Australian dollar had fallen by 4.2 percent. Petrol prices were steady," he says.

In April the overall Index was 14.3 percent above its long run average.

However, Evans says this ‘outperformance’ was mainly due to the expectations components of the Index.

"Combined, these components were 23.3 percent over their long run average whereas current conditions components were only 2.5 percent over their average," he says.


ECONOMIC OUTLOOK

The Expectations Index fell by 10.8 percent while the Current Conditions Index was down by 1 percent.

Evans says respondents have lost their buoyancy with respect to the economic outlook.

"The component of the Index assessing the economic outlook for the next 12 months fell by 17.3 percent while the five year outlook fell by 10.6 percent," he says.

Expectations for family finances over the next 12 months also fell by 3.6 percent.

INTEREST RATES ‘STARTING TO BITE’

Despite a recent run of consecutive rate rises over the last three months, Westpac remains "very confident" the RBA will place them on hold when the Board next meets on June 1.

"Recent Statements from the Governor and the minutes from the May Board meeting indicate that the Board now believes that rates have returned to normal levels," Evans says.

"It is clearly time for a pause. As we have seen with the Index today interest rates are now starting to bite," he adds.

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