Australia: Recent falls in consumer sentiment will be unsettling for policymakers - Westpac

Matthew Hassan, analyst at Westpac, suggests that their latest Red Book finds a mixed bag of developments for the Australian economy since April.

Key Quotes

“On the plus side, the rate cuts we anticipated from the RBA have come through earlier than expected with another move waiting in the wings. Meanwhile, the surprise Federal election win for the Coalition has removed uncertainty around tax policy and seen the Government’s Personal Income Tax Plan pass into legislation. Housing markets have also improved with signs that prices are stabilising in the Sydney and Melbourne markets.”

“That is about where the good news ends. Despite these positives, the Westpac–Melbourne Institute Consumer Sentiment Index has registered a 4% fall since our April report. Sentiment can often weaken when the RBA cuts rates, but this is usually when some other shock is rolling through such as the GFC. There is no such shock hitting at the moment.”

“Instead, the survey detail highlights a sharp loss of confidence around the economy – one that is raising concerns about job security and over-riding expectations for a policy boost to family finances.”

“The fall in sentiment will be troubling for the RBA. The chart below shows how the current trajectory for sentiment and for the ‘finances’ and ‘economy’ components compares to responses over all easing cycles since 1990.”

“Initial sentiment responses to rate cuts can often be ambivalent as there are often other negatives in play (e.g. the GFC). However, the 2019 response is at the weakest end of the range and is surprisingly negative given the absence of a GFC-style ‘threat’ and that the prospect of income tax relief should also be providing some support.”