Consumer sentiment down despite improving economy

The Westpac Index of Consumer Sentiment dropped by 5.1% in April, despite rises over the past two months and some recent positive economic news.

The move is a surprise, considering the Reserve Bank decided to keep interest rates on hold at 3% during last week’s meeting.

Over the previous two months consumer sentiment had risen by 9.9% and while economists believed sentiment the momentum would have slowed, a fall of this nature wasn’t expected.

Westpac senior economist Matthew Hassan told SmartCompany there had previously been signs of a cyclical recovery in consumer sentiment.

“The drop of 5.1% was quite surprising. Economic factors such as retail sales and job numbers in the past month had been positive and there was also just a slightly better vibe.”

“Clearly there were also negatives, but given how things were tracking in sectors like the property market, we didn’t think we’d see such a decline.”

Hassan said the result shows “consumers are fragile” and the ongoing recovery is “shaky”.

“There has been more speculation about the potential for interest rates to rise, if this is the case it indicates sentiment is influenced by interest rates, which is something the Reserve Bank should be aware of,” he says.

All five sub-indexes were also down. The outlook for family finances over the next year fell 0.2%, while the outlook for economic conditions over the next 12 months dropped 4.5%.

The outlook for conditions over the next five years dropped 8.3%.

The largest decreases in consumer sentiment were from households earning an income of between $40,000 and $60,000 and from those who are renting a property.

Consumer sentiment among people earning between $40,000 and $60,000 dropped by 17.3% this month. This income bracket is the only one to have recorded an overall decline in sentiment since this time last year.

Westpac chief economist Bill Evans said in a statement consumers could be concerned over a potential rise in interest rates, with the index tracking views on ‘time to buy a dwelling’ down 11.4%.

“Rising house prices can have a mixed impact on assessments on ‘time to buy’ with the potential for capital gains acting as a positive, but reduced affordability for potential first home buyers acting as a negative.”

“However, the sharp decline in April may be further evidence around the fragility of the consumer and its nervousness around any suggestions of rising interest rates,” Evans says.

The RBA is due to meet on May 7 and Evans does not expect there will be a change in interest rates – but there may be a move later this year.

“The Board retains an easing bias but the tone of various communications from the Board suggests it is comfortable to remain on hold. Westpac is forecasting that growth in the Australian economy in both 2013 and 2014 will be around 2.5%, well below potential of around 3.25%.

“With inflation firmly under control that suggests that there is a need for the economy to get more stimulus. Accordingly, we expect that rates will come down further in 2013,” Evans says.