Australia | Jul 09 2008
By Chris Shaw
Higher interest rates and fuel prices are beginning to hit home for Australian consumers, as the Westpac-Melbourne Institute Index of Consumer Sentiment for July has surprisingly fallen a further 6.7% to a reading of 79.0, its lowest reading for the past 16 years.
As the bank’s chief economist Bill Evans notes the outcome was not expected given interest rates have held steady over the past month and the Index was already at multi-year lows, with the last time it was at such a depressed reading being when the economy was slowly emerging from the recession of 1990/91.
The difference this time is unemployment is still low whereas 16 years ago unemployment was close to 11%, while general economic conditions now are far better than was the case back then. As Evans notes though, the consistently weak readings imply an upcoming period of weak consumer spending and associated economic activity.
Given the Reserve Bank of Australia (RBA) held interest rates steady over the month Evans suggests it was petrol and oil prices that contributed most to the decline in the Index, as on average petrol prices are up more than 15% in the past three months and over the same period the Index has fallen almost 10%.
Such a correlation is not unusual as Evans notes back in 2005 there was a period between July and October when petrol prices rose 15.8% and the Index fell by almost 9% over the same time, again while interest rates were unchanged. But other factors must also be included in the fall in July as the Australian sharemarket is down more than 9% since the last survey and employment also recently fell for the first time in 19 months.
Three of the five components of the Index recorded substantial falls, with Households’ assessment of their finances now compared to a year ago down 6.2% and their assessment for the next 12 months down 12.2%. The Household assessment of economic conditions in the year ahead fell by 15.5%, but the outlook for economic conditions over the next five years and whether or not now was a good time to buy a major household item were both little changed from the previous survey.
With the RBA board meeting to decide on interest rates again on August 5th Evans suggests the upcoming CPI data due later this month will be of great interest as it is likely to show inflationary pressures remain elevated. On the other side of the coin the RBA has likely lowered its growth estimates since May and Evans expects this will give the bank enough leeway to leave rates unchanged.