Consumer sentiment starts year on a downbeat note

The mood among Australian consumers soured further in January, although there are signs that households expect conditions to improve in the future.

The Westpac-Melbourne Institute consumer sentiment index declined 0.7 per cent to 92.1 in January, the second consecutive monthly drop. The survey was conducted between January 6-9 and it’s also worth noting that responses were weaker among those surveyed on the latter two days of the reporting period.  
 

As well as the ongoing unsettled global backdrop, it is possible that consumers were reacting to news around the Australian dollar’s sharp drop against the US dollar, which resulted in some negative headlines about the outlook for interest rates and the broader economy.

The sub-index showing consumers’ assessment of their finances compared with a year ago reversed gains seen in December, falling 7.8 per cent in the month to 77.7. The decline was particularly marked for outright homeowners. 

Renters also recorded a small decrease in the month in this component, while homeowners with a mortgage saw a 15 per cent increase, which took this component back to 2022 levels for this group. 

Mortgage holders are less likely to be retired than the other two groups and thus more likely to have benefited from last year’s tax cuts. Still, the result highlights that the positive impact of the tax cuts on take-home pay needs to be balanced against all the other factors that have been dragging on families’ finances, including ongoing cost-of-living pressures.

Forward-looking measures in the survey were a little more positive, indicating that households are more optimistic that better times lie ahead. 

Expectations about family finances over the next 12 months reversed last month’s decline, while confidence around the outlook for the economy in the coming year was unchanged following a fall in December. Views about the economy in five years’ time improved a little – up 0.7 per cent in January – but at 96.6, this component remains below November’s level. 

The sub-index which asks whether now is a good time to buy a major household item continued its steady improvement, rising 1.8 per cent to 90.8. 

Although perceptions of family finances have deteriorated, consumers may be responding more than usual to the discounting on offer during the major sales periods around Black Friday and post-Christmas. 

Consumer views on the outlook for interest rates were broadly unchanged in January. Those who expect rates to increase still outnumber those who expect them to fall, but over the past four months the gap has been much narrower than it was over the previous few years.

The Reserve Bank Board next meets on February 17–18. Recent communications indicate that the Board is becoming more confident about returning inflation to the 2–3 per cent target band. However, the latest sentiment survey highlights some of the ‘mixed signals’ still coming from the consumer. In addition, the labour market appeared to stop easing in the second half of 2024. 

There is still a chance the Board cuts the cash rate in February or April if inflation comes in below expectations for the December quarter. But on balance, Westpac expects rates to remain unchanged in February, with the first easing to come in May.

To read Luci’s full note, visit WestpacIQ.