Australia | Feb 13 2008
By Rudi Filapek-Vandyck
The Westpac/Melbourne Institute Index of Consumer Sentiment fell by 5.5% in February from 103.1 in January to 97.4 in February.
Economists at Westpac explain that an Index level below 100 indicates that pessimists now outnumber optimists. Also, the fall in the Index follows the Reserve Bank’s 0.25% increase in the cash rate to 7% on February 5. That rate hike followed the average 0.15% increase in new and existing variable mortgage rates by the major banks in January and two previous increases in the cash rate by the RBA in August and November last year.
Westpac notes consumer Sentiment has fallen sharply following each of the six RBA rate hikes from 2005-2007. This time is no different. The average fall in the Index following a rate hike over 2005-2007 was 9.7% and on two previous occasions in August and November 2006 the Index fell below 100 to 90 and 95 respectively. The Index is now 12.6% below its level a year ago; 15.5% below the average level in 2007 and 6.5% below the average in 2006.
The economists also note that after plunging in both August and November 2006 to below 100 the Index quickly recovered through the first half of 2007 to reach an all time peak of 123.9 in May 2007. Confidence among Australian consumerss has now fallen fairly steadily through the second half of 2007 to now be down 21.4% from that peak.
Despite the fall in Confidence through the second half of 2007 Westpac points out consumer spending has sustained strong momentum. Retail sales volumes grew by 1.6% in the December quarter and real household disposable income grew by 7.8% through the year. The economists believe lower confidence levels are likely to see the consumer again opt for a higher level of savings. They predict continuous strong income growth will support “decent growth” in consumer spending in the months ahead.
The confidence of respondents with a housing loan fell by 6% this month. However, the economists highlight that those who wholly own their own home registered an 11.3% fall in confidence, indicating that factors in addition to interest rates may have been significant contributors in the fall.
The component of the Index assessing the outlook for economic conditions over the next 12 months fell sharply (by 14%), but the component assessing the economic outlook for the next five years rose by 10.3%. So did the outlook for family finances over the next 12 months: up by 3.6%.
Overall, Westpac reports, the expectations Index fell by only 0.1%, compared to a 13.1% fall in the current conditions Index. Opinions on whether now is a good time to buy a major household item fell by 15.5% while opinions on family finances compared to a year ago were down by 10.7%.
Westpac economists have joined their colleagues elsewhere and believe the Reserve Bank of Australia will raise official interest rates again at the March meeting. Assuming the bank will raise by 25 basis points, this would take the official cash rate to 7.25%.