Australian consumers remain in a subdued mood heading into the second half of 2026, according to Westpac Economics' latest Red Book, even as actual household spending has proven more resilient than sentiment alone would suggest.
The Westpac-Melbourne Institute Consumer Sentiment Index lifted modestly over the three months to July, but the July reading of 83.9 remains in the bottom 10% of results across the survey's 50-year history.
Westpac describes the mood as one of cumulative exhaustion following a string of global and domestic shocks, from COVID and post-pandemic inflation to tariff disruptions and renewed conflict in the Middle East.
Westpac Economics summed up the outlook as "a long road back to 'normal'" in its overview, noting that while conditions have improved slightly since May, the recovery is likely to be slow.
That mood, however, tells only part of the story. Despite the weak sentiment readings, spending has not fallen as sharply as historical patterns between the two measures would imply.
Westpac's analysis attributes much of this disconnect to the specific psychological impact of high inflation, arguing consumers found the initial 2022 inflation shock and subsequent rate rises unusually difficult to process compared with past cycles.
The report suggests the gap will most likely close through a recovery in sentiment rather than a further slide in spending, as inflation continues to moderate over the coming 12 to 18 months.
Consumers have become somewhat less anxious about further rate rises, with the mortgage rate expectations index easing over the quarter, though it remains well above long-run averages.
The RBA left the cash rate unchanged at its August meeting, continuing to warn it was prepared to hike again if upside risks to inflation materialise.
Home-buyer sentiment stayed weak overall, though renters and non-investors showed clearer improvement than existing owners.
House price expectations fell sharply as capital city values softened, marking the first below-average reading on that measure since March 2023. Meanwhile, risk aversion jumped to near-record highs in June, with the share of consumers nominating real estate as the "wisest place for savings" dropping to an all-time low of just 4.5%.
Westpac currently expects the Reserve Bank to leave the cash rate on hold through the remainder of 2026, with only a gradual easing in policy settings anticipated from mid-2027.
Get the hottest and freshest property and mortgage news delivered right into your inbox. Subscribe now to our FREE daily newsletter.
