Consumers see chink of light as pressures ease

The Westpac-Melbourne Institute consumer sentiment index improved by 6 per cent in February, the strongest survey outcome since last April, in an early sign that households are starting to feel a little more confident.

The headline index rose to 86, from 81 in January, and while it remains in deeply pessimistic territory it has now recovered to levels last seen in mid 2022. 
 

There was a lot to like in the detail of the latest survey, with all five index components seeing an improvement.

The assessment of whether now is a good time to buy a major household item saw the strongest gain, rising by 11 per cent. That sub index has been extremely weak over the past 12 to 18 months, capturing a lot of the cost-of-living pressures that are bearing down on consumers. 

There was also a significant lift in expectations for the economy in the year ahead. People are becoming more confident that inflation is getting under control, and that in turn will allow the Reserve Bank to start cutting interest rates down the track.

The prospect of tax cuts kicking in from July 1 also seems to be getting more traction among consumers.

Expectations around family finances over the next 12 months remain subdued. There were some gains among lower and middle income households, where the Stage 3 tax cuts have been re-jigged to give them more benefit, while high income households were slightly less positive.

Survey respondents prior to the RBA’s February interest rate meeting recorded an index reading of 94.1, compared with a reading of just 80 among those who responded afterwards. 

That 15 per cent swing is on a par with some of the biggest post-RBA deteriorations we saw when the bank was still raising interest rates in mid-2023. While the decision to leave the cash rate unchanged in February was widely expected, the pull-back in sentiment suggests many consumers were hoping for a more positive tone.

Taking a glass-half-full perspective, that could mean sentiment will recovery quite sharply once we get a clear signal from the RBA that inflation is under control and their focus has shifted to the timing of rate cuts. 

Right now, consumers are about 50:50 on whether we see another rate rise, or they’re on hold before being cut over the next 12 months. That’s quite a big turnaround from three or four months ago.

The bottom line is while we’re still at weak levels in terms of sentiment, and spending is likely to remain constrained in the near term, the detail is starting to show that we’re moving in the right direction.  

For Matt's full report, visit WestpacIQ.