Consumer sentiment takes a dive in September

by Julia Corderoy16 Sep 2014
Consumer sentiment has taken a dive in September, falling by 4.6% according to the Westpac Melbourne Institute Index of Consumer Sentiment.

Four of the five components of the Index fell during September, while only one component – ‘family finances over the next 12 months’ – remained steady. 

Of most concern was the five year economic outlook. This component, which is typically much more stable than the one year outlook, reached its lowest assessment in 16 years. It has plunged 28.6% from its level one year ago, as households expect any current economic weakness to be sustained for a considerable period.   

Westpac’s chief economist, Bill Evans said that this is a “surprising” and “disappointing” result. 

“Following the 6.8% plunge in the Index in the aftermath of the Commonwealth Budget in May the Index had stabilised and was gaining ground. From June to August the Index had lifted by 5.9% to find it only 1.3% below the pre-Budget level. The Index is now 5.8% below the pre-Budget level and only 1.1% above the post-Budget print. In effect most of the steady recovery we had seen in the Index over the last 3 months has been eroded,” he said.

The Index showed that households continued to expect house prices to keep rising, with the assessment of ‘time to buy a dwelling’ decreasing by 8.2%. Evans said that this is now 23.2% below its peak level in September last year.

“Clearly, households are unnerved by rising prices, surmising that affordability issues are constraining the attractiveness of buying a house. As we saw in the recent housing finance statistics, the momentum in the housing markets is clearly moving towards investors who are motivated by prospective price gains and rental yields and less affected by affordability considerations,” he said.

Evans says that these results could make an argument for the Reserve Bank to make further cuts to interest rates, however, he doesn’t believe this will be an option.

“The disappointing results in this survey are consistent with a need for lower interest rates rather than higher interest rates. However, the Governor has made it clear that lowering interest rates is not on the policy agenda. In his recent statement following the September Board meeting he reiterated his guidance that “the most prudent course is likely to be a period of stability in interest rates”.