Consumer sentiment plummets on federal budget woes: Westpac survey

Consumer sentiment has recorded its largest negative change since December 2011, according to the latest results from Westpac – and it’s all thanks to the federal budget.

All five indices of the monthly survey declined, with the biggest fall of 13.4% found in the index measuring consumers’ views on economic conditions over the next 12 months. Indices measuring family finances against a year ago, and for the next 12 months, also declined.

The measure is a surprise given the Reserve Bank’s cut, which was passed on by all four of the major banks.

Overall, sentiment fell by 2.4%, seasonally adjusted.

But Westpac chief economist Bill Evans said in a statement the survey now shows pessimists outnumber optimists for the first time since October 2012, and it’s due to last week’s federal budget announcements.

“In this survey we added an additional question around respondents’ assessments of the budget and the results confirm our reasonable assumption that this weakness in confidence is being driven by a sharply negative response to the budget,” he said.

The source of the fear is likely the government’s budget shortfall, which insinuates the economy isn’t performing as well as it should.

“These concerns are also likely to have been fuelled by the surprise fall in the Australian dollar before and during the survey period,” Evans said.

The survey also included a special question about the federal budget, which asked whether the government’s plan would make respondents worse off. Only 5.4% said the federal budget would improve their financial position, and a massive 44% said they would be worse off.

“We have been conducting this separate budget question since 2010 and this response is by far the most negative,” Evans said.

While Evans says other issues affecting the economy, such as unemployment numbers and house prices, did affect the result, “we expect the budget and the associate fiscal deterioration have been the dominant drivers”.

The most important issue is whether this is a long-term problem, Evans says. While the ‘budget blues’ could be temporary, they also might represent an underlying drag on consumer sentiment.

The key point here is that consumer confidence is fragile, he said.

“This weakness is likely to persist for some time,” Evans said.

At this point, Evans said the confidence result was good enough reason for a rate cut next month when the Reserve Bank meets again.

“However, the outlook for business investment and the path of the Australian dollar will be important factors in that decision,” he said.

CommSec economist Craig James also said in a statement the Westpac result shows there is a “growing proportion of Aussie consumers that get worried that rates are being cut – worried that this signifies a weak economy”.

“And there are also a lot of savers that don’t want rates to fall. So while the Reserve Bank may favour a rate cut, board members may need to do more homework to determine if it will actually be positive.”

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