Sentiment setback points to consumer uncertainty on economic outlook

Consumer sentiment turned lower in December, stalling after the positive momentum seen in recent months as fresh doubts crept in over the economic outlook. 

The Westpac–Melbourne Institute Consumer Sentiment Index fell 2 per cent to 92.8 in December from 94.6 in November.

We had been cautious on whether the strong recovery in sentiment seen in the October and November surveys could be sustained, and it seems our concerns were well founded. 
 

While we don’t see the monthly index decline as marking a major shift in trend, it does signal that the consumer recovery might be coming through more slowly.  

Third quarter national accounts data, which showed economic growth was a sluggish 0.8 per cent for the year to September, looks to have had an impact in eroding confidence on the economic outlook. 

At the same time, the RBA’s decision to leave interest rates on hold at its December meeting may have cooled consumer expectations around the timing of rate cuts. On balance, Westpac economists expect the RBA to start cutting rates in May 2025. 

The majority of consumers (56 per cent) see interest rates at the same level or lower by this time next year, but the pace of easing is seen slower, especially among mortgage holders. 

There were some positive aspects to this month’s report. For example, the sub index showing assessments of family finances compared to a year ago rose by nearly 7 per cent. It’s still in negative territory overall but easing cost-of-living pressures and relief from Stage 3 tax cuts and other support measures look to be taking some of the pressure off household budgets. 

Consumers are a little more cautious on the prospects for family finances over the next 12 months but still expect them to improve as we head into 2025. 

Buyer sentiment also picked up in the latest survey. The sub-index which asks whether now is a good time to buy a major household item has been very weak for a long time, reflecting cost-of-living pressures and the associated decline in purchasing power, but we’re now starting to see a more substantive improvement.

That recovery in buyer sentiment is also feeding through to an improvement in actual spending. For example, Westpac’s card tracker data showed that Black Friday sales activity has been quite strong. 

Overall, the setback in sentiment in the December survey reflects uncertainty among consumers on the economic outlook and the timing of rate cuts, so it looks like the recovery is going to be a gradual one. 

To read Matt’s full report, visit WestpacIQ.