Consumer sentiment edges up

The Westpac Melbourne Institute Index of Consumer Sentiment increased by 2.4% in January to 97.1 points, but the increase has been described as a “somewhat disappointing” result by a leading economist.

Westpac chief economist Bill Evans is dismissive of the increase, claiming recent interest rate cuts have failed to raise consumer confidence.

“Despite the Reserve Bank having cut the cash rate by a total of 50 basis points… the index is still slightly below the level which it registered before the first rate cut,” Evans says.

“In effect, at this stage, the rate cuts have been unable to raise consumer confidence [but] that does not mean that the cuts have necessarily had no effect.”

Evans says given the ongoing financial turmoil in Europe, a flat housing market and further weakness in the labour market, sentiment is likely to have been lower without the rate cuts.

“This read represents the sixth out of the last seven months where the index has indicated that pessimists outnumber optimists,” he says.

“The average read over those last seven months is 96, only 1.1% below the current level and 8.8% below the average for the previous seven months.”

“On a number of occasions, we have highlighted our particular interest in those components of the index which measure how respondents feel about their own finances.”

“Economic behaviour is likely to be more heavily influenced by how individuals feel about their own financial position than the overall state of the economy.”

In the survey, the results around those issuers were disappointing, Evans says.

“The sub-index tracking responses on ‘family finances compared to a year ago’ fell by 2.5% while the sub-index tracking responses on ‘family finances over the next 12 months’ rose by only 0.7%,” he says.

“Nevertheless, a positive aspect of the recent results is that expectations on family finances are now registering their highest level since February 2011.”

With the RBA due to hold its next meeting on February 7, Westpac expects the cash rate will be reduced by a further 0.25%, which would make it the third consecutive cut.

“Even at 4%, there is ample scope for the board to go further given the benign outlook for inflation. Indeed, we expect a follow-up move in May,” Evans says.