Consumer sentiment deteriorated further over the three months to July, Westpac’s latest Red Book report shows, as the surging cost of living and the RBA’s rapid interest rate increases put the squeeze on households.
The Westpac-Melbourne Institute consumer sentiment index fell by 5.3 per cent to 81.3 over the period – the only time the index has been weaker was during the darkest days of the recession in the early 1990s.
We’ve started to see consumers dip into the savings they built up over the pandemic years of 2020 and 2021 to manage these pressures. So far, they’ve run down about $20 billion of the $260 billion buffer that was accumulated and we expect that trend to continue.
Spending stalled in the first quarter of 2023, and went backwards in the second quarter. Westpac card tracking data shows a decline of about 0.5 per cent quarter to quarter and that weakness looks to be carrying over into July and the third quarter.
With that backdrop, it’s no surprise that risk aversion is at very high levels. Westpac’s risk aversion index rose by 4.7 points to 60.8 in June, a record high on estimates going back to the mid-1970s. Over a quarter of consumers now favour paying down debt as the best use of their savings while the proportion favouring shares and real estate are holding near historic lows.
On a more positive note, we’ve clearly passed the peak for inflation here in Australia, and the signals from overseas, particularly the US, are pointing to a swift cooling in price pressures.
Expectations around consumer prices have also been well behaved, and should track lower, so the prospect of a return to a low inflation environment looks promising.
Still, we’re going to have to get through a bit more interest rate pressure before we see any significant improvement in consumer sentiment. Westpac economists expect a further two 0.25 per cent increases in the cash rate, delivered at the RBA’s August and September Board meetings.
To read the full report, visit the WestpacIQ website.