Consumer sentiment falls amidst floods

Consumer sentiment fell by 5.7% in January to 104.6 points as the Queensland floods start to take their toll on the economy.

Westpac chief economist Bill Evans says the result represents a significant fall in the index, although it is still around 4% higher than its long-term average.

“It is now down 12.9% from a year ago and is 8% below its average level in 2010. Because of the extreme events in Queensland and the lower than usual representation from Brisbane, it is interesting to assess the national index excluding Queensland,” Evans says.

“Excluding Queensland, the index fell by 3.2% while, as discussed, including Queensland it fell by 5.7%.”

Evans says the ‘ex-Queensland’ index points to a significant fall in confidence across the country.

“Despite these other states not being directly affected by the floods in their major cities, it is likely that perceptions of the implications of the floods for the national economy and their own financial positions have been adversely affected,” he says.

“The Reserve Bank board next meets on February 1. On February 4, the Reserve Bank will release its Statement on Monetary Policy – included in that statement will be revised growth and inflation forecasts for the Australian economy.”

“No doubt those revised forecasts will be discussed at the board meeting and the growth implications from the floods will be incorporated.”

“Those implications are likely to highlight an economic contraction in the March quarter as the floods disrupt exports, private construction, services and manufacturing.”

“Even before the advent of the floods, Westpac did not expect another rate increase until the second quarter of 2011.”

“These tragic developments are likely to delay the next rate increase to the second half of 2011. We confidently expect rates to remain steady following the board meeting on February 1.”

ANZ senior economist Riki Polygenis says Australian policymakers will face some difficult decisions from the second quarter of 2011.

“In the short-term, the shock to the economy from widespread flooding will clearly keep the RBA, which was already on the sidelines, from further tightening,” Polygenis says.

“But, the medium-term inflation outlook remains fundamentally problematic… Indeed, ANZ now expects core inflation to reach 3% by the end of 2011 and to remain above 3% for the remainder of 2012 and into early 2013.”