Australia | May 20 2009
By Chris Shaw
While some recent data have been encouraging there remain clear signs the Australian economy continues to do it tough, the latest being the May results from the Westpac-Melbourne Institute Index of Consumer Sentiment that showed a further decline in this measure.
Sentiment fell by 4.3% in the month to a reading of 88.8, Westpac chief economist Bill Evans suggesting the outcome reflects consumer response to the Federal Budget that came out just prior to the survey being conducted. The results of the survey suggest the Budget was not seen as that supportive for consumers. Evans points out the May results represent the second biggest fall following a Budget in the past ten years.
In some ways such a response is no great surprise, as Evans notes the Budget this year was framed in what are very dificult economic circumstances. Regardless, he sees the survey result as a disappointing outcome given in recent weeks there has been considerable improvement in both financial markets and offshore sentiment.
Some other factors do come into play with respect to the May results, Evans noting some sort of retracement was not unexpected given the sharp increase in the index in April and the fact the Reserve Bank of Australia (RBA) didn’t cut interest rates at the May meeting. Offsetting these perceived negatives was the fact both equity markets and the Australian dollar recorded solid gains in April.
Looking at the various age brackets and income levels of those surveyed also gives some insight into the result according to Evans, as confidence among those aged 25-44 fell by more than 7% while confidence among those earnings more than $60,000 annually fell by 6.5% against a 5% fall for those on an income of less than $40,000.
Large falls were recorded in the category of consumer assessment of their own financial position, with family finances against a year ago falling by 7% and family finances for the next year declining by 7.3%. In other words, consumers didn’t see the Budget as improving their individual financial position.
While the short-term economic outlook section of the survey recorded unchanged results, expectations of economic conditions over the next five years fell by more than 13%, Evans suggesting this indicates consumers becoming unnerved by the increase in Government debt associated with the Budget.
On the flip side there was a more than 7% rise in those thinking now was a good time to buy a major household item, Evans seeing this as a response to the cash flow boost households have enjoyed from the fiscal stimulus measures of recent months.
The RBA meets again on June 2nd and Evans expects interest rates will again be kept on hold. He is quickly to add this doesn’t mean we have reached the low point in the rate cycle. As a further response to rising unemployment will be needed, Evans sees the rate cutting cycle starting again in August, with a further 1.0% to be taken from the current cash rate before the cycle reaches its conclusion.