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Australia consumer sentiment: Outlook brightens despite inflation headwinds

13:58, 21 September 2022

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Australian consumer sentiment is hovering around historic lows Photo: Sinung Wahyono / Shutterstock

Australia’s consumer sentiment fell to historic lows in August 2022, seen only during periods of major disruption, like the Covid-19 pandemic and the global financial crisis of 2008.

Inflation and rising interest rates have become major concerns for households that have seen their expenses soar in 2022. While the latest monthly consumer confidence report for September indicated a small rebound in optimism, economists still remain concerned as central banks are expected to continue hiking rates till the end of the year.

Will Australia’s consumer sentiment see a rebound? In this article, we review everything you need to know about consumer sentiment in Australia, analyst forecasts and the factors affecting it.

What is consumer sentiment?

Consumer sentiment is an economic indicator that looks to measure the overall health of a nation’s economy. It shows how optimistic consumers are about the future.

Consumer sentiment is measured by conducting household surveys, asking consumers to share their spending plans.

The Consumer Confidence Index (CCI) is a commonly used measure of consumer sentiment globally, while the Michigan Consumer Sentiment Index (MCSI) is also used in the US.

According to the Organisation for Economic Co-operation and Development (OECD), the CCI provides an indication of future developments of households’ consumption and saving, based upon answers regarding their expected financial situation, their sentiment about the general economic situation, unemployment and capability of savings.

A CCI above 100 signals a boost in consumer confidence, where consumers are more inclined to spend money on major purchases than save in the next 12 months, said the OECD.

CCI values below 100 indicate a pessimistic attitude towards future developments in the economy, possibly resulting in a tendency to save more and consume less.

As consumer spending makes up a majority part of gross domestic product (GDP) in several countries, consumer sentiment is seen as an important barometer that influences economic policies.

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Historic data: Australia consumer sentiment over the years

Data compiled by TradingEconomics showed that the Westpac-Melbourne Institute Index of Consumer Sentiment for Australia fell to multi-decade lows in the first half of 2020 during the peak of the Covid-19 pandemic.

Widespread lockdowns and uncertainties over the timeline of vaccines had pushed consumer confidence to historic lows during the time.

Consumer sentiment rose and fell in 2020 as Covid-19 and city lockdowns reduced growing optimism over the economy’s health.

In 2021, Australian consumer sentiment rebounded to stay in positive territory for the entire year as cities reopened, services resumed, unemployment fell and vaccination rates rose.

The Westpac-Melbourne Institute Index of Consumer Sentiment ended 2021 at 104.3 points for the month of December, having eased from 105.3 points recorded in the previous month, with inflation concerns attracting more of the public’s attention.

AUSTRALIAN CONSUMER SENTIMENT INFOGRAPHIC

“We found a sharp increase in awareness of inflation. In December 2020 only 5% of respondents recalled any news on inflation. This has lifted to 21%, exceeded only by news on employment and economic conditions,” said Westpac in its December 2021 report.

In 2022, Australia’s consumer sentiment index saw nine consecutive months of decline between November 2021 and August 2022. The index remained in negative territory for most of 2022.

How is the current consumer confidence trending in Australia? For the month of September 2022, the Westpac Melbourne Institute Index of Consumer Sentiment came in at 84.4 points.

Consumer confidence in Australia: Inflation is the main concern 

Inflation in Australia has risen to a high not seen since the early 1990s. 

Raging price increases have prompted Australia’s central bank, the Reserve Bank of Australia (RBA), to implement an aggressive monetary tightening policy that has seen interest rates rise from 0.1% at the start of the 2022 to 2.35%, as of 21 September 2022.

With interest rate hikes expected to rise further in the last quarter of 2022, consumers fear that the ultra-hawkish stance of global central banks will lead to recessions and job losses across the world.

Australia’s consumer sentiment fell for the ninth straight month in August 2022. The Westpac Melbourne Institute Index of Consumer Sentiment came in at 81.2 points in August.

The index value was around levels that had only been seen during periods of major disruption in the Australian economy including the Covid-19 pandemic and the global financial crisis of 2008, said Westpac.

Unsurprisingly, inflation was the main driver of weakening consumer sentiment.

The latest quarterly inflation report revealed annual headline inflation increased to 6.1% in the June quarter due to higher dwelling construction costs and fuel prices. 

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Inflation data has trended significantly above the RBA’s target band of 2% to 3%. Economists expect the RBA to extend its rate hike cycle at least till the end of the year.

Homeowners are particularly concerned. The 225 basis points (bps) interest rate hike undertaken by the RBA since May 2022 to quell inflation has added to mortgage payment costs.

“For example, with the 225 basis point increase in the mortgage interest rate – from average mortgage rates prior to May – monthly payments on a new (principal and interest 25-year) loan will be around 25 per cent larger,” said the RBA.

However, the RBA added that currently over 35% of housing credit is fixed-rate debt, and these borrowers ‘won't face an increase in their interest expenses and loan payments until their fixed rate expires.

September’s Australia consumer sentiment data showed that the consumer confidence rose from historic lows to gain 3.9% month-on-month to 84.4 points.

Bill Evans, Westpac Chief Economist, commented on the development:

“Consumers may be a little less fearful, but confidence remains very weak. Index reads in the 80-85 range mean pessimists still greatly outnumber optimists.”

According to Westpac, the recent drop in oil prices has had an “immediate impact on budgets.”

Results of the September survey showed inflation was still the major concern among 61% of survey respondents, followed by the economy, budgeting, interest rates and overseas economic conditions.

Westpac’s September report also revealed that consumer risk aversion remained “intense”. In all, 31% of respondents favoured “safe or defensive options”, like bank deposits, and 23% favoured paying down debt.

Riskier investment options among respondents, including real estate and stocks, fell to 8% and 10%, respectively, in September.

Furthermore, the Australian dollar (AUD) has seen weakness in 2022 amid a bearish economic outlook and high inflation. The AUD/USD has lost nearly 10% in the last six months, as of 21 September, making it more expensive for Australians to travel abroad.

Selling pressure on the Aussie, a commodity currency, has increased in the face of a global economic slowdown and easing commodity prices in recent months.

With the threat of recession looming in many economies and a diminishing demand outlook for commodities, multi-national bank HSBC said risk-on currencies, like the AUD, could underperform safe-haven currencies, like the USD.

Australia consumer sentiment forecasts: Uncertainty remains

Australia consumer sentiment forecasts will be influenced by inflation data, the rate hike outlook and Australia’s overall economic health.

Initial forecasts indicate a gloomy outlook for the near term. 

The RBA has cut Australia’s gross domestic product growth forecast to 3.25% for 2022, from 4.25%. The central bank raised its headline inflation forecast for 2022 to 7.75%, from 6%.

The raised inflation forecast highlighted the RBA’s need to be more aggressive on the rate hike front to control inflation.

David Plank, head of ANZ Research, said the central bank could hike rates by 50 bps in October to take the cash rate in Australia to 2.85%.

Bill Evans of Westpac also saw the RBA hiking rates by 50 bps in October and added that the terminal rate could reach 3.6% by February 2023.

“The current weakness in Consumer Sentiment is still deeply troubling. The September rise might be heralded as the likely start of a sustained revival. As welcome as that would be, it seems premature given ongoing challenges, especially around inflation, and prospects of further interest rate rises,” read the Westpac Melbourne Institute Index of Consumer Sentiment for September 2022.

The report continued:

“It will be interesting to see how Consumer Sentiment responds if the pace of tightening slows. As highlighted, sentiment was unlikely to fall below the 80 level while labour markets were operating near full employment, notwithstanding the headlong collapse since November last year. We expect Sentiment to hold in the current range as consumers realise that the tightening cycle has further to run, although a smaller rate increase in October will be encouraging for some.”

According to global macro models and analysts expectations from TradingEconomics, Australia consumer sentiment was projected to trend around 100 points in 2023 and 98 points in 2024.

When looking at Australia consumer sentiment forecasts, it’s important to bear in mind that analysts’ forecasts can be wrong. Forecasts shouldn’t be used as a substitute for your own research. 

Always conduct your own due diligence. Remember that your decision to trade or invest should depend on your risk tolerance, expertise in the market, portfolio size and investment goals. And never invest money that you cannot afford to lose.

FAQs

How is consumer sentiment measured in Australia?

The Consumer Confidence Index (CCI) is a commonly used measure of consumer sentiment globally.  The Westpac Melbourne Institute Index of Consumer Sentiment is considered the standard benchmark of consumer sentiment in Australia.

How does consumer sentiment affect the market?

As consumer spending makes up a majority part of gross domestic product (GDP) in several countries, consumer sentiment is seen as an important barometer that influences economic policies.

What causes consumer sentiment to rise?

Optimism over a future economic environment where consumers are less prone to save and more inclined to spend money on major purchases boosts consumer sentiment.

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