Australia | Mar 12 2008
By Rudi Filapek-Vandyck
It doesn’t happen that often but economists at Westpac chose to use the rather sensationalist title “Consumer Sentiment Collapses” for today’s press release to announce the results of their monthly gauge of consumer sentiment in Australia. As you would have concluded from the previous sentence, the omen is not positive with the Westpac-Melbourne Institute Index of Consumer Sentiment falling by 9.1% in March. The index fell from 97.4 in February to 88.6 in March.
Westpac economists can only conclude that “this is an extraordinarily large fall”. Even though the 9.1% fall is around the 3 year average of a 9.4% fall in their Index following a rate hike by the Reserve Bank, the economists point out this month’s fall has come from a lower base and pushes the Index to its lowest level since September 1993.
In addition, the economists note the decline over the last three months (23.9 points or 21.2%) is the sharpest three month decline since the Index was first measured in January 1975. There were many other periods during that time when the Reserve Bank did consecutive rate hikes so this result cannot just be attributed to the shock effect of consecutive moves, they believe.
The current credit crisis, Westpac notes, which is pushing mortgage and other retail lending rates even higher than the rises associated with the Reserve Bank, has also precipitated the biggest (23.3%) fall in the share market since the recession in 1990-91.
Predictably, the confidence of the respondents who hold a mortgage fell by a spectacular 12.1%, to be 31.5% down over the year compared to the overall index which is down by 23.3%.
All components of the Index were down sharply this month. The assessment of family finances compared to a year ago fell by 15.6%, while opinions on whether now is a good time to buy a major household item fell by 10.9%. Expectations for family finances over the next 12 months fell by 8%. The outlook for economic conditions over the next 12 months was down by 5.6% and the 5 year outlook also fell by 5.6%.
Westpac economists note households have dramatically changed their attitudes about where to save. The proportion of respondents choosing shares fell by 6.7 percentage points to 7.9% from 14.6% in December. This reading is well below levels seen in the aftermath of the dot-com bubble burst in 2001, and clearly the lowest on record for this series which commenced in 1995. Real estate was also unpopular. The proportion choosing real estate as the wisest place for savings fell by 3.7 percentage points from 21.1% to 17.5%. Households now clearly favour banks (up 2.4 percentage points to 24.7%) and paying down debt (up 8.4 percentage points from 12.9% to 21.3%).
The economists note overall spending plans have also become much more conservative. The Index on whether now is a good time to buy a dwelling fell by 11.4% since December, to 71.8 the lowest since the housing boom faltered in late 2003 and the second lowest since the question was first included in 1995. Intentions towards motor vehicles have soured. The Index of whether it is a good time to buy a car fell by 22.5% since December to the lowest level since the question was first included in 1995, and 28.3% below the average level over the last 10 years.
The economists believe the results from this survey are very important as they indicate that the Reserve Bank’s last rate hike, combined with further independent moves from the mortgage lenders may have finally slowed demand such that inflationary pressures will ease. They believe the last rate hike in a cycle will generally have a much bigger effect than the moves that preceded it. As such, the rate hike in March appears to fit that profile.
Westpac economists now believe the March rate hike by the RBA may well turn out the last one in this cycle. Even though they suspect that inflation will remain uncomfortably high while generous tax cuts later this year are likely to significantly boost households. Westpac predicts interest rates are now likely to stay around these relatively high levels until the RBA feels confident that inflation pressures have eased significantly. That is not expected to occur before the second half of 2009 “at the earliest”.