Consumer sentiment takes a turn for the worse

The Westpac-Melbourne Institute consumer sentiment index dropped 6.9 per cent in February to return near to the historic lows we saw back in November.

At 78.5, the latest index read is just above the 78 read in November but below the low point of the global financial crisis, and only slightly higher than when the COVID pandemic first hit in April 2020. Prior to that, we need to go back to the deep recession in the early 1990s to find weaker index readings.

We had seen a modest improvement in sentiment through December and January on hopes that the inflation threat may be easing and the RBA might be nearing the end of its tightening cycle.

However, those hopes were dashed by a strong December quarter inflation report and the RBA’s 25 basis point interest rate rise at its February meeting, plus a very hawkish statement. 
 

The RBA decision came mid-way through the survey period, and responses showed a significant deterioration in its aftermath. Sentiment amongst those surveyed before the decision was a relatively steady 83.5, but dropped sharply to 74.8 in the later responses.

Given that most people were expecting a rate hike, the results indicate that the RBA’s rhetoric around further increases was what really did the damage.

When we dig beneath the surface, the details show very weak reads around family finances versus a year ago and assessments of whether now is a good time to buy a major household item. These two components are generally good pointers to shifts in actual spending, and they are telling us that consumers are poised to cut back sharply.

That hasn't quite happened yet, and the RBA will be looking for much clearer evidence of this before they pause the tightening cycle.

The Reserve Bank board next meets on March 7 and Westpac economists expect the cash rate to increase by a further 25 basis points to 3.60 per cent, pausing in April before a final 0.25 per cent increase in May.

For now, inflation is still the dominant concern, but there's a clear warning coming from the consumer in these sentiment reads.