Consumer sentiment nose dives in wake of Budget

by AB23 May 2013

Consumer sentiment fell sharply in the wake of the Budget, according to the Westpac Melbourne Institute Index of Consumer Sentiment.

The index recorded a significant drop of 7% in May, from 104.9 in April to 97.6 this month.

Westpac chief economist, Bill Evans, says this figure pushes the index back into a range where pessimists outnumber optimists for the first time since October 2012. It’s the lowest read since August 2012.

“Of course, the remarkable aspect of this result is that it is the first read of the index since the Reserve Bank cut the cash rate by 0.25% on May 7. Absent any other major influences, we would have expected a solid boost to the Index following that rate cut.”

“However,” notes Evans, “since the rate cut we have seen the announcement of the Federal Budget. In this survey we added an additional question around respondents' assessments of the Budget and the results confirm our reasonable assumption that this weakness in confidence is being driven by a sharply negative response to the Budget.”

“We expect that the dissatisfaction is not only due to concerns around some of the savings measures in the Budget, but also the sharp deterioration in the fiscal position, indicating renewed fears about the overall state of the economy.”

Evans says the RBA has argued that it has further scope to ease and believes that this result points to the need to use that scope.

“Our own special question around the Budget in the survey indicated that 44% of respondents assessed that the Budget would make them worse off with only 5.4% seeing it as improving their position (The balance of the respondents were neutral). We have been conducting this separate Budget question since 2010 and this response is by far the most negative.”

“The key issue,” he says, “is whether this response represents a short term reaction to a Budget that will be forgotten in a couple of months or whether the Budget Blues will linger for some time.”

There was, however, good news on housing.

“Households recognise the significance of the rate cut for housing activity along with evidence that a patchy upswing in dwelling prices is under way. The index, ‘whether it is time to purchase a dwelling’ increased by 11.1%. That increase redressed the sharp fall in the index in April when respondents were unnerved by media coverage which included speculation that rates might be going up.”

 “The survey result strengthens the case for another rate cut as early as June,” argues Evans.

“However, the outlook for business investment and the path of the Australian dollar will be important factors in that decision.”