Consumer sentiment falls sharply


Concerns about deteriorating global financial markets has seen consumer sentiment drop in June

Consumer sentiment falls sharply
Consumer sentiment falls sharply
June 9, 2010

A mixture of concerns about deteriorating global markets and the government’s proposed resources super profits tax has seen consumer sentiment drop sharply in June.

New data out today shows the Westpac–Melbourne Institute Consumer Sentiment Index fell by 5.7 percent to 101.9 this month, down from 108 in May.

Westpac's Chief Economist Bill Evans says
with the Reserve Bank
leaving rates on hold this month, the decline in sentiment may not be due to rates.

"In the March, June, September and December surveys we ask additional questions relating to broad categories of issues that affect sentiment," Evans says.

While the most recalled items usually relate to interest rates, he says the latest survey found a strong response to ‘budget and tax’.

Other categories which registered high recall scores were economic conditions (48 percent); interest rates (34 percent); and international conditions (32 percent).

The score for international conditions was the highest since the Asian financial crisis in 1997-98, even higher than scores registered during the recent global financial crisis.

"Concerns about international economic conditions were heightened. This category registered its highest unfavourable assessment since the end of the global financial crisis and, apart from the readings in the depths of the crisis, the highest unfavourable prints since September 2005," Evans says.

While global market concerns were at their peak, the recall score on interest rates was down significantly from 44 percent in March to 34 percent in June.

Reasons for concerns with the global economy can be best exemplified by the 6.2 percent fall in the share market and the 7.5 cent fall in the AUD since the last survey – both following substantial declines over the previous month.

RESULTS

Within the components of the Index, the dominant mover was how respondents assess their personal finances relative to a year ago.

This component fell by 17.7 percent – the biggest fall since 2005 when petrol prices soared in the wake of Hurricane Katrina in the US.

However the level of this component is still above the lows printed during the global financial crisis in 2008.

Movements in other components of the index were more subdued.

Expectations for ‘economic conditions over the next 5 years’ dropped 9 percent; expectations for ‘family finances over the next 12 months’ fell 4.2 percent; and opinions on whether it was a ‘good time to buy a major household item’ slipped 2.2 percent.

However, the spending intentions measures in the latest survey have proved quite resilient.

‘Time to buy a dwelling’ rebounded 7.3 percent from its 15.4 percent slump in May and ‘time to buy a car’ rebounded 1.6 percent from a 6.4 percent fall in May.

More encouragingly, consumers' short term outlook for the economy improved with expectations for ‘economic conditions over the next 12 months’ rising 2.8 percent.

FUTURE RATE RISES

With the Reserve Bank Board next meeting on July 6, Evans insists Westpac is not changing its view that rates must remain on hold.

"The next significant meeting will be on August 3. At that meeting the Board will have received an update on inflation. We know that with limited spare capacity in labour and housing markets, inflation pressures are building. The Bank is also forecasting above trend growth in both 2011 and 2012," he says.

"However this survey does highlight the impact of financial market turmoil on the confidence of households. If this turmoil persists over the next two months, the Board will have a very difficult decision if the new inflation data points to further rising inflation pressures."


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