Consumer confidence slumps amid financial turmoil

Consumer confidence has taken another dive as concerns continue to mount about the global economy, but experts say the outlook could get even gloomier as financial markets remain volatile.

The Westpac-Melbourne Institute Index of Consumer Sentiment fell 3.5% in August, from 92.8 in July to 89.6, indicating global economic conditions are already having an impact.

“Coming after a fall of 8.3% in July, this latest fall is sending a significant message… The index is at its lowest level since May 2009,” Westpac chief economist Bill Evans says.

Evans warns the outlook may become even gloomier, pointing out that three quarters of the survey was conducted prior to the share slump on August 5.

“Some 76% of [the 1,200] respondents answered the survey before Friday, August 5, when confidence would have been severely jolted by turmoil in global financial markets,” he says.

Evans says the index recorded confidence levels of 91.4 for those surveyed before the share slump, and just 83.9 for those surveyed on August 5-6.

“Two points are relevant here. Firstly, the index had fallen by 1.6% even before the financial turmoil and secondly, not surprisingly, the period of financial turmoil… printed an index only slightly above the absolute lows of the 2008-09 period,” he says.

“As expected, this financial turmoil has added another dimension of risk to consumers over and above those issues associated with interest rates, house prices, carbon tax and, potentially, jobs,” Evans says.

Consumer confidence had been in the doldrums since the beginning of the year, initially due to fears of another interest rate rise, and more recently because of fears for the global economy.

Global markets have been shaken by US’ credit downgrade by Standard & Poor’s credit rating agency late last week.

Westpac broke ranks with the other major banks in July when it forecast the Reserve Bank would lower interest rates to 3.75% by the end of 2012 in response to consumer fear caused by the debt crisis in Europe.

Since then, markets have tipped a 40% chance of a 50-basis-point cut to the RBA’s cash rate, which is currently at 4.75%.

This morning, JP Morgan withdrew its forecast for an end-of-year rate rise, predicting interest rates would remain flat for the rest of the year.

Meanwhile, the Australian dollar is trading higher after the US Federal Reserve said interest rates could stay at their record lows until mid-2013.

Around midday, the dollar was trading at 103.21 US cents, up from 102.25 US cents yesterday afternoon.