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.”