Consumer sentiment plunges in July

A consumer sentiment poll painted a dire picture of household sentiment, with households’ assessments of their financial positions nearing GFC levels.

The Westpac-Melbourne Institute consumer sentiment survey of 1200 people, conducted between July 4 and 9, found sentiment fell by 8.3% in July to 92.8, down from 101.2 in June.

Westpac chief economist Bill Evans says it is a “surprisingly weak result” with the index falling to its lowest level since May 2009.

A combination of factors appears to have pushed confidence lower, including interest rate concerns, the European financial crises and uncertainly about the carbon price.

While all components of the index fell in July high income earners and mortgage holders were particularly bearish, with sentiment dropping by 11.1% and 16.5% respectively.

The bank is tipping central banks to keep rates steady until 2012, with “an easing bias the most appropriate policy response to the current economic circumstances”. At 4.75% Australia’s official cash rate is the highest in the developed world.

“Despite the Reserve Bank keeping rates on hold following the board meeting in July (until the last governor’s statement) the bank has persisted with its strongly hawkish rhetoric,” Evans says.

“This is continuing to undermine confidence amongst households who it would appear are incredulous that such a policy is favoured given the current circumstances.”

In a key finding for retailers the number of respondents reporting that “now is a good time to buy a major household item” fell by 9.5%.

The index tracking views on the outlook for economic conditions during the next 12 months fell by 13.5% while the index tracking the five-year outlook fell by 10.2%.

The banks says a “most disturbing aspect” of the report is that households’ assessments of the outlook for their finances is now lower than in every month except for July 2008, during the GFC and the month before the introduction of the GFC.

But it’s not all bad news. Confidence in buying a house picked up 3.3% and is now at its highest level since January 2010, most likely driven by recent dips in house prices.

“Recognition that houses have become a little more affordable might improve sentiment but concerns that prices may fall further are likely to continue to restrain households’ buying intentions,” Evans says.

The survey showed that most respondents expect house prices to rise rather than fall.

Separately, a report from the National Australia Bank painted a positive picture on international growth but sliced its Australian GDP growth forecasts for 2011 to 1.7% on the back of softness in discretionary spending and delays in recovery of coal export volumes.

“The domestic economy continues to struggle under the weight of the high AUD, consumer reticence and the lingering impacts of the January floods,” NAB chief economist Alan Oster says.

“While we expect to see a boost to GDP growth in the June quarter as the economy recovers from the flood-induced downturn in the March quarter some weakness appears to have persisted,” he says.

“Retail trade growth was disappointing in May with trends in retail trade growth remaining subdued. Employment growth in May also disappointed.

“Household saving rates are high and asset prices have been soft during the first half of 2011.

“While business credit barely rose in May, housing credit continued to grow at a modest pace.”

The bank expects economic growth to pick up next year to 4.6% and tips the RBA to lift rates to 5% in December.

“By then the strength of GDP should be well-established, with a final adjustment to 5.25% in May next year,” NAB says.

The report tips global growth to exceed 4% through 2011 and 2012, underpinned by China, India, Latin America and the Asian tiger economies.