Consumer sentiment falls amid rate rise speculation

Consumer sentiment fell by 1.3% in May to 103.9 points, according to the Westpac-Melbourne Institute of Consumer Sentiment, making it the lowest level of the index since June 2010.

Westpac chief economist Bill Evans says while the drop is only a “modest adjustment” to the index, it still sends a subdued message about the state of the consumer in the current economic climate.

“This is the lowest level of the index since June 2010, a month which followed three consecutive rate hikes by the Reserve Bank in March, April and May,” Evans says.

According to Evans, increasing talk of the next interest rate rise may have unnerved consumers, while the Federal budget may also have played on people’s perceptions of their own finances.

“36% of respondents expected that the budget would worsen their family finances over the next 12 months and only 7% expected it would improve their finances,” he says.

“That compares with [the results] in 2010 where 27% expected the budget to worsen their finances, with 11.5% expecting an improvement.”

According to the survey, the comparison of family finances to a year ago fell by 4.1% while expectations for family finances over the next 12 months fell by 6%.

However, other components of the index performed much more solidly in May. For example, the outlook for economic conditions over the next five years rose by 5%.

“The one year outlook for the economy fell by 3.2%, while ‘whether now is a good time to purchase a major household item’ rose by 1.7%,” the report says.

“The strength of the Australian dollar… and ongoing reports of Australia benefitting from the commodity boom are likely to be boosting long-term confidence in the economy.”

“The high dollar, with its associated impact on the prices of imported goods, may explain why respondents see buying opportunities, although concerns about their finances are holding back actual purchases.”

Evans’ comments are in line with the latest results of the Commonwealth Bank Business Sales Indicator, which reveals retail sales slumped in April by 0.2%.

According to CommSec chief economist Craig James, conservatism is “still clearly the word of choice” when it comes to the Australian consumer.

“Mums and dads throughout Australia were spared additional hardship thanks to the delivery of a softer Federal budget, however we don’t yet know what the full impact of this will be on their overall level of confidence,” James says.

“With the prospect of two additional rate rises over the remainder of 2011, it wouldn’t be surprising if sales continued to trudge along at this pace for some time to come.”