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Consumer pessimism persists on rate caution

01:00pm June 26 2024

The Westpac Melbourne Institute consumer sentiment index rose 1.7 per cent to 83.6 in June, remaining in deeply pessimistic territory. 

While there are some tentative signs of improvement around family finances, that’s being offset by renewed concerns about persistent high inflation and what that might mean for the future path of interest rates.

One big takeaway from the June survey was that nearly half of Australians expect mortgage interest rates to rise over the next 12 months, indicating that many are still on high alert for another RBA rate hike. 

That's flowing through to expectations for the wider economy and eroding some of the confidence that was starting to show through around jobs.

The latest survey included additional questions on which topics consumers recall hearing items about in the news, and whether that news was perceived as favourable or unfavourable.

Two things stood out in June. The first was budget and tax news, which was viewed as less unfavourable than it was three months ago. That likely reflects cost of living supports that are starting to come through, as well as Stage 3 tax cuts which take effect on July 1. 

The second was inflation, where the news was seen as less favourable than it was three months ago.

In fact, all 15 news topic areas covered – ranging from politics to jobs, the economy, and international conditions - were seen overall as unfavourable. That's been the case for two and a half years now, making it the longest run of news negativity since we started running the survey in the mid-1970s.

To get a sustained rally in sentiment from here, we need clear evidence that this period of high inflation has ended, and that still feels a little way off yet.

Until we get that news, any slight improvement around family finances is likely to be offset by ongoing concerns around inflation and interest rates. 

For the RBA, their most recent communications have highlighted that they have become more uncertain around consumer behaviour.

On the one hand, some recent data revisions have suggested that consumer spending hasn't been quite as weak as previously assessed.

There's also a question mark around how consumers will respond once tax cuts and other cost-of-living supports start to flow through. 

However, in terms of current conditions, the survey is telling us clearly that consumers are in a weak state and spending is likely to remain subdued.

In addition, the survey also suggests that the consumer’s response to those upcoming tax cuts is going to be muted. Risk aversion remains relatively high and as we saw in special questions about tax cuts last month, most consumers plan to save the additional income.

We’ll need to track the data closely in coming months to see whether that plays out, but on balance it looks like it’s going to be a pretty flat finish to this year for consumers.

To watch a longer version of Matt’s report, visit WestpacIQ

Matthew is a senior economist with Westpac. His specific areas of expertise are housing markets and the Australian consumer sector. Matthew’s research has been instrumental in shaping Westpac’s views on the Australian economy, including recent calls on official interest rates. His research has provided important insights into housing market developments and the behaviours of the Australian consumer. He is the author of Westpac’s monthly Red Book report, regards as essential reading on the consumer sector. Before joining the Westpac team in 2007, Matthew held senior positions with leading economic consultancies in Australia and New Zealand.

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