Bad news for retailers as consumer sentiment tumbles

Date: 14.12.2011

Consumer sentiment has fallen to its lowest level since August despite consecutive rate cuts

December 14, 2011

Consumer sentiment has fallen to its lowest level since August despite consecutive rate cuts, offering little hope for retailers in the lead up to Christmas.

The Westpac - Melbourne Institute Index of Consumer Sentiment fell by 8.3 percent to 94.7 in December, down from 103.4 in November.

Westpac's Chief Economist Bill Evans says the Index dipped to similar levels back in August, when respondents were concerned that the Reserve Bank was preparing to raise interest rates.

"On face value it should be a surprise that the Index has not risen following a second rate cut from the Reserve Bank (which was eventually passed on in full by the major banks to mortgage borrowers)," Evans says.

"However the history of previous easing cycles shows that rate cuts do not guarantee an improvement in sentiment," he adds.

According to Evans, specific news which is likely to have unnerved respondents is the reported increase in the national unemployment rate from 5.2 percent to 5.3 percent.

"Of course, the constant stream of news on developments in Europe is also likely to have impacted respondents, while equity markets were volatile," he says.

Four of the five components of the Index fell this month.

The sub-index tracking views on ‘economic conditions over the next 12 months’ was down by 19.4 percent, while ‘economic conditions over the next 5 years’ fell by 14.4 percent.

‘Family finances compared to a year ago’ fell by 8.6 percent, however, expectations for the next 12 months improved by 3 percent.

The sub-index tracking views on ‘whether now is a good time to buy a major household item’ also posted a fall, down by 3 percent.

While successive rate cuts in November and December will no doubt make future decisions more difficult, Westpac maintains that there is "plenty of scope for more cuts".

"This read on Consumer Sentiment will be noticed by the Bank although it will also observe the resilience of overall consumer spending as measured by the national accounts despite generally poor prints for Consumer Sentiment in the second half of 2011," Evans says.

He says that Westpac expects the RBA Board to further cut rates at its next meeting on February 7 next year.