According to Bill Evans, Chief Economist at Westpac, the March release of the Westpac Melbourne Institute Index of Consumer Sentiment highlights a disturbing lift in risk aversion amongst Australian households.
“Compounding this result is a sharp fall in how respondents assess their own finances. Our research highlights a direct link between these factors and consumer spending. That is despite a relatively benign headline result.”
“The Westpac Melbourne Institute Index of Consumer Sentiment rose by 0.1% in March from 99.6 in February to 99.7 in March. The Index appears to be stabilising around the point where optimists and pessimists are near equal in number.”
“Despite the benign overall result one of the components of the Index, ‘Family finances compared to a year ago’ fell by 5.3%. This component is now at its lowest level since June 2014 when respondents were shaken by the May Budget announcement. However, on that occasion the overall Index was much lower than we see today, indicating that, currently, respondents are particularly concerned about their own finances. News from the December quarter national accounts that wage incomes had fallen by 0.5% is indicative of the source of these concerns. That news, of course, complemented the Wage Price Index report that wages growth had fallen to a record low of 1.9%.”
“The Reserve Bank in particular focuses on this component of the Index. In its recent Statement on Monetary Policy it noted "Households’ perceptions of their personal finances are around average" (since then the perceptions have deteriorated).”
“We expect that the key driver of this caution is weak growth in household incomes and nervousness around asset markets. We expect these issues to carry well into 2018 providing a significant hurdle for market expectations that the Reserve bank will be raising rates in 2018.”