Australia | Dec 11 2008
Rudi Filapek-Vandyck
Australian Consumers’ inflationary expectations fell sharply again in December to a median of 2.5% from 3.3% previously, according to a survey conducted by Westpac and the Melbourne Institute. Economists at Westpac report the December reading is the lowest since March 2005.
The trend level in December is just 2.99%, down from June’s peak of 5.40%. Westpac reports the median expectation of managers and professionals (collected since 1995) fell to just 2.0% from 3.5% previously. This is the lowest level since December 2001.
In the detail, the proportion of consumers expecting inflation above the 2% to 3% target band plunged to 41.2% from 51.8%, which is the lowest proportion since December 2003 and well below the twelve-month average of 63.1%, Westpac reports. However, the proportion expecting inflation within the band also fell, to 6.9% from 9.5%, a record low since the series commenced in 1994.
Westpac economists believe this is because a large proportion of respondents who were previously expecting inflation above the band actually moved into categories expecting prices to fall (9.5% vs 6.0% previously), prices to stay the same (23.7% vs 17.6% prev), or into the “don’t know” category (18.3% vs 14.8% prev). The economists point out the trend in the net balance of respondents expecting higher prices overall fell sharply further to 50.7% from 57.0%, a new record low.
Despite the strong bounce in December consumer sentiment, consumers’ unemployment expectations fell only marginally, leaving their trend at extremely pessimistic levels, the economists highlight. Westpac reports the unemployment expectations index fell 0.7% in December to 172.17 after a 13.2% jump previously. This took the trend deviation from its full history average higher still to 33.4% from 24.1%.
Westpac explains this deviation is now similar to that seen in the 1990/91 recession. This would suggest recession levels of consumer pessimism about the labour market outlook. The economists concede these extremely pessimistic consumer labour market expectations continue to suggest downside risks for their own labour market projections.
Westpac currently expects jobs growth to slow to 0.2% (annualised) through 2009, lifting the unemployment rate in Australia towards 6%. The economists explain they prefer to base their labour market forecasts on other leading indicators of labour demand from the Westpac-CCI Survey of Industrial Trends, job advertisements, and a new composite labour demand indicator they have recently put together which aggregates all the major business surveys employment outcomes, as well as the bank’s lagged profile for domestic demand growth.
At this stage, reports Westpac, these preferred indicators argue for a less pessimistic outlook, but the economists can only concede after today’s survey release that the downside risks to their prognosis are clear.