Consumer confidence at its lowest in Australia since 1990s recession

Consumer confidence fell in January to its lowest level for the first month of a new year since the 1990s recession. The Westpac-Melbourne Institute Consumer Sentiment Index fell 1.3 percent to 81 points. Westpac senior economist Matthew Hassan said this reading was in the bottom 7 percent of all sentiment measures ever recorded since the survey began in the mid-1970s.

“For consumers, the new year looks to have picked up where the old one left off: cost of living and high interest rates continuing to dominate and sentiment bumping around deeply pessimistic levels,” Mr Hassan said. “The continued weak reads on sentiment show Australian consumers remain under intense pressure as the surging cost of living, materially higher interest rates and rising tax take weigh heavily on incomes.”

The sub-indexes measuring consumers’ outlook for the economy and their personal finances in 2024 remained “materially below long-term averages”. Mr Hassan said there was a further deterioration in family finances this month.

“The ‘finances compared to a year ago’ sub-index dropped 7.6 percent to 63, unwinding most of the 11 percent improvement seen over the three months to December. Those in low- and middle-income brackets reported the biggest deterioration in the month.”

Australians are also worried about the medium to long-term prospects for the economy. Consumers’ five-year outlook on the economy fell 6.1 percent to 89.1 points, with young renters driving this fall.

Just over half of the 1,200 people who participated in the survey said they expected interest rate rises to continue in 2024. This is down from 60 percent in December and follows the lower monthly inflation reading of 4.3 percent in November, as well as expectations in the United States that the Federal Reserve will begin cutting interest rates in the world’s biggest economy this year.

Mr Hassan commented that Australian consumers are much more ‘hawkish’ on rates than the financial markets and economists. “While just over half of consumers expect mortgage rates to rise, futures markets are currently pricing in 50bps in cuts by year-end, with three out of four economists also expecting the cash rate to move lower,” he said.

Housing-related sentiment continued to show “a stark gap between buyer sentiment and price expectations”, Mr Hassan noted. The ‘time to buy a dwelling’ sub-index fell 3.1 percent to 72 points, which is considered very weak. More than two-thirds of consumers expect house prices to rise in 2024. This follows a surprising 8.6 percent lift in the national median house price in 2023, according to CoreLogic data.

This price growth was largely due to fewer homes for sale, more cash buyers at the market’s upper end, greater demand in cheaper suburbs, which resulted in strong price growth, and increased first home buyer activity facilitated by the Bank of Mum and Dad and the expanded First Home Guarantee scheme.

Looking ahead, the December quarterly inflation read to be released by the Bureau of Statistics on 31 January will be critical to the Reserve Bank’s next interest rate decision on 6 February, said Mr Hassan.

“On balance, we expect the RBA to leave rates unchanged in February, and to be unlikely to raise rates further from here,” he said. “However, a material upside surprise on inflation would make for a more finely balanced decision.”

SYDNEY—Australian Treasurer Jim Chalmers will deliver the government’s 2024-2025 federal budget next Tuesday amid concerns that strong revenue growth will tempt him toward a jump in spending, stoking the case for higher interest rates.

Economists expect Chalmers to announce a budget surplus for 2023-2024, supported in part by high commodity prices and strength in the job market, with unemployment continuing to hover near its lowest level in half a century.

The question on the lips of the governor of the Reserve Bank of Australia, Michele Bullock , will be how much of that revenue will flow back into the economy by things like added measures aimed at easing a cost-of-living surge for consumers.

Bullock told reporters Tuesday that the RBA’s board had considered a further rise in interest rates, sending a shot across the bow of the center-left Labor government ahead of the budget.

The budget is being framed ahead of a federal election expected to be held in early 2025.

The public acknowledgment of the RBA board’s discussion of what would be a 14th interest-rate rise in two years signaled that the central bank has grown more concerned about the inflation outlook after first-quarter data came in above its own expectations.

Economists have warned that the RBA isn’t even close to a decision to cut interest rates, and the more likely outcome at the moment is that the central bank will need to tighten the policy screws further before the end of this year.

“The challenge fiscal policymakers face is that although they are flush with revenue, a cautious approach ought to be taken to additional spending because the economy is still operating at full employment, and inflation is still too high,” said Paul Bloxham, chief economist at HSBC Australia.

“Loosening fiscal policy settings at this point could mean that monetary policy would need to be tightened further yet—or that rates need to be higher for longer,” he added.

The RBA is conscious of the fact that significant income tax cuts will be delivered midyear and that they target low- and middle-income earners, who are more likely to spend added income than save it.

The government has already signalled its plans to spend in the area of subsidies for local manufacturing, including for the production of solar panels.

In addition, the budget will focus on business tax incentives, increased defence spending, funding for domestic violence support, changes to student debt policy and infrastructure.

Chalmers has played down the risk over the budget stoking the flames of inflation.

“It will be a responsible budget, a restrained budget, and it will maintain our focus on that inflation fight,” he said Thursday in a radio interview.

“There will be help for people with the cost of living, but we’ll make sure that that cost-of-living help is part of the solution and not part of the problem when it comes to inflation,” he added.

A risk that the RBA will also be alert to is the probability that the government will hold back some of its revenue gains to support added spending closer to the election.

Josh Williamson , chief economist at Citi Australia, said Chalmers will likely push new spending into the future to avoid overheating the economy now.

“The government does not want to be seen promoting policies that add to the risk of further policy tightening,” he said.

This suggests that new spending will be pushed into the government’s forward budgetary projections, while measures that directly reduce inflation could be announced virtually immediately, Williamson added.

Consumer confidence at its lowest in Australia since 1990s recession

High interest rates and the cost-of-living crisis are creating a gloomy outlook among many

The budget is being framed ahead of a federal election expected to be held in early 2025