Australia | Nov 11 2009
By Rudi Filapek-Vandyck
The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 2.5% in November from 121.4 in October to 118.3 in November.
Westpac economists suggest that given the fact that a RBA rate hike preceded this pullback in sentiment, the term best used to describe what occurred this month is a “modest” fall in consumer confidence. They note the level of the Index is still 38.3% above its level from a year ago.
Say the economists: the average read for the Index over the last three months (119.7) is really only exceeded in four previous periods of strong optimism since the survey began in 1975. Those periods were December 1983-May 1984 (120.2); March 1994-July 1994 (121.4); July 2004-February 2005 (119.8) and May 2007-July 2007 (122.1).
Over the two month period since the RBA began raising rates the Index has now fallen by 0.8%. This, say the economists, is broadly comparable to the 0.7% fall they registered in response to the beginning of the last rate hike cycle when the RBA raised rates by 0.25% in both May and June 2002.
In contrast the Index fell by 5.2% following the consecutive increases in November and December 2003. Westpac economists point out that second sequence of increases was from a higher interest rate base.
With household debt levels now higher than in 2003, the economists suspect the 2.5% fall in the Index is probably an indication that consumer sentiment will become progressively more sensitive to the sequence of future rate hikes. Most economists expect the RBA to continue raising interest rates until at least the end of the first quarter of next year.
Also, Westpac says, whereas last month other factors such as the share market and petrol prices had been supporting overall sentiment, the reverse has happened in this survey. Petrol prices rose by 2.3%; while the share index was down by 3.3%. The Australian dollar increased by 1.2%. All components of the Index fell in November, the economists point out.
Those components measuring expectations registered the largest falls: “family finances over the next 12 months” (minus 4%); “Economic conditions over the next 12 months”(minus 2.5%) and “Economic conditions over the next 5 years” (minus 3.7%). Those components measuring current conditions were more resilient: “Good time to buy major household items” (minus 1.2%) and “Family finances compared to a year ago”(minus 0.7%).
Say the economists: given that the Expectations Index was at its highest level on record in October, a sharper fall (minus 3.4%) than in the Current Conditions Index (minus 1%) was not surprising.
Westpac economists suggest retailers should still be encouraged given that opinions on “whether now is a good time to buy a major household item” are still up 58% on a year ago. They note there was a fall of 4% in sentiment towards housing in November.
“Whether now is a good time to purchase a dwelling” is now down by 15% over the last three months. Westpac notes however, this result is a more resilient result than registered in those periods of consecutive rate hikes in 2002 and 2003 when sentiment towards housing fell by over 30% on both occasions.
All in all, Westpac economists believe the Reserve Bank Board will again decide to raise the official cash rate by 25bp at its meeting on December 1. Not unimportant, the economists believe their monthly survey is indicating that “we have probably now reached the point in the rate hike cycle when households will become increasingly sensitive to higher rates”.