BILL’S BITES: Sentiment still gloomy, despite green shoots

Bill Evans
06:00pm December 13 2022

The Westpac Melbourne Institute Consumer Sentiment Index rose by 3 per cent to 80.3 in December, from 78.0 in November.

Despite this welcome bounce, following a disastrous 6.9 per cent drop in November, the level of the index remains comparable with the lows seen during the COVID pandemic and the Global Financial Crisis. 

In this survey, we asked households about the news items that most grabbed their attention. The key topics have not changed since we last asked in September, with inflation by far the dominant category, followed by the state of the economy and interest rates. 

Respondents generally assessed the news on these categories to be deeply negative, although the interest rate story was interesting. There were signs that consumers are starting to see that the bulk of the interest rate hikes are now behind them, which fits with our own forecast.

The RBA has already lifted the cash rate by 3 percentage points, and we expect another 75 basis points of tightening over the first half of next year. 
 

There was an 11.3 per cent improvement in confidence among mortgage borrowers, although it's coming off very low levels. The proportion of people expecting rates to go up by 1 per cent or more was 49 per cent, down from 73 per cent in July. 

And people are also feeling better about the outlook for their finances over the next twelve months, with that sub-index rising by 6.9 per cent. 

By far the most stunning result was a 27 per cent jump in the outlook for house prices, taking the index back into territory which indicates that more people expect prices to rise than fall. That might prove to be an over-reaction, but it’s certainly a sign that there’s some confidence coming back into the housing market.

Labour market sentiment stabilised, after a 17 per cent deterioration across the previous two surveys, and confidence there is still running well above the long-term average. 

Finally, risk aversion remains strong among consumers. The survey showed 55 per cent of respondents see the best place to save is in bank deposits, or paying down debt, compared to only 15 per cent who favoured property or shares. 

So overall, while there are some economic green shoots, consumer sentiment remains very subdued. Next year, I think we’ll start to see that weak sentiment drag on spending and growth, and we expect that the economy will be stagnating in the second half of 2023.

For the full report, visit WestpacIQ. 
 

Bill Evans

William (Bill) Evans is Westpac’s economic spokesman and is responsible for all of our economic research. In 1991, Bill joined Westpac as the Chief Economist and Head of Research. A graduate of Sydney University (BEc. Hons I and University Medal) and the London School of Economics (M. Sc.), Bill has worked as Research Manager for the Reserve Bank of Australia and as a Treasurer at the Commonwealth Bank of Australia. Bill travels frequently, advising Westpac’s customers on the Australian economy and financial markets.

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