BILL’S BITES: Sentiment dented after rate hike, budget

The Westpac Melbourne Institute Consumer Sentiment Index fell by 7.9 per cent to 79.0 in May from 85.8 in April.

The index is now back to the lowest levels we've seen on a sustained basis since the deep recession of the early 1990s. 

The two key factors influencing confidence in the latest survey were interest rates and the federal budget. 

The RBA raised the official cash rate by a further 0.25 per cent at its May meeting in the week before the survey. The move came as a major surprise to markets and most commentators, clearly stoking consumer fears of more increases to come.

Meanwhile, the survey was conducted before and after the budget was announced, to give an insight into its impact on confidence.

Sentiment amongst those surveyed before the budget showed an index read of 81.3, down 5.3 per cent compared to April, while the post-budget index came in at 75.3, down an additional 7.4 per cent.

We interpret this to show that about 40 per cent of the weakness in confidence occurred before the budget and the other 60 per cent post-budget.

Clearly people were concerned about the impact the budget might have on inflation and interest rates, whereas Westpac economists' view is that it will not threaten interest rates in the near term.

In fact, the news on the budget was not all bad. The survey asked specifically whether respondents felt it would improve or worsen their finances. It showed 27 per cent expected their finances to worsen, while 15.5 per cent thought they would improve.

Since we began asking this question in 2010, every year we've seen those saying the budget would worsen their finances outnumber those saying they expected an improvement. The net balance this time of 11.5 per cent was actually very good. We've only seen one smaller net balance, and that was in 2018 when the budget included substantial tax cuts. So overall, I think the government can be reasonably comfortable with the response.

The other big news was a 10.7 per cent jump in confidence around the outlook for house prices, which followed a 14 per cent jump last month. That index is now at 144, indicating that there are four times more optimists than pessimists over the next 12 months.

That's an extraordinary result, and consistent with other information we're currently seeing around the housing market. 

The housing story, and the strength we continue to see in the labour market, will be a big factor when the Reserve Bank sits down to consider interest rates in June and July and then again in August. 

However, the weakening in the overall economic environment will be an equally important consideration.

We believe the RBA will pause in June and that by August, when the Board gets a bit more information on inflation, they will decide to remain on hold. But that risk is very much evenly balanced.

For the full report, visit WestpacIQ.