Budget woes sees consumer sentiment fall to lowest level since August 2012, but housing sentiment lifts: Westpac index

Consumer sentiment fell “sharply” and against expectations in the week following the RBA’s decision to cut the cash rate to a 53-year-low of 2.75% with budget concerns the primary reason for confidence slipping.

The Westpac Melbourne Institute Index of Consumer Sentiment fell by 7% from 104.9 in April to 97.6 pushing it back into a range where pessimists outnumber optimists for the first time since October 2012.

“It is the lowest read since August 2012. Over the last two months the Index has fallen by 11.7% to fully reverse the promising 9.0% increase we saw in February and March,” says Westpac chief economist Bill Evans.

Sentiment about the housing market defied the overall drop in consumer confidence with the ‘time to buy a dwelling’ sub-index lifting 11.2% in May to be up 20.7% over the past 12 months.

“Households recognise the significance of the rate cut for housing activity along with evidence that a patchy upswing in dwelling prices is under way,” says Evans.

He says the 11.2% increase in May “redressed the sharp fall in the Index in April when respondents were unnerved by media coverage which included speculation that rates might be going up.

“It is better to assess the move in this survey as back to around 1.5% above the average level for the previous 6 months when there was a sustained positive response to the implications of lower rates for purchasing dwellings,” he said.

Looking at the overall result, Evans says the “remarkable aspect of this result is that it is the first read of the Index since the Reserve Bank cut the cash rate by 0.25% on May 7.

“Absent any other major influences, we would have expected a solid boost to the Index following that rate cut,” he says.

The drop in sentiment has been attributed to concerns about the Federal Budget with the May survey including a special Budget question with 44% of respondents assessed that the Budget would make them worse off with only 5.4% seeing it as improving with the balance of responses neutral.

“We have been conducting this separate Budget question since 2010 and this response is by far the most negative,” he says.

The survey of 1,200 Australians was conducted in the week from May 13 to May 18 with the budget announcement of a forecasted $18 billion deficit in 2013-14

Evans says the results of the latest survey confirm “our reasonable assumption that this weakness in confidence is being driven by a sharply negative response to the Budget”.

He tips a rate cut in June with the cash rate to hit 2% in the first quarter of 2014.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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