Rising inflation and interest rates dent May consumer sentiment

  • By Zilla Efrat

The rising cost of living pressures and the prospect of higher interest rates are unnerving Australians and have helped push the Westpac-Melbourne Institute Index of Consumer Sentiment down by 5.6 per cent – from 95.8 in April to 90.4 in May.

Westpac chief economist Bill Evans says the index is now at its lowest level since August 2020 when households were unsettled by the “second wave” lockdown in Victoria.

“Excluding the shocks to confidence associated with the pandemic, this fall of 5.6 per cent is the largest since a 6.9 per cent fall in June 2015, when a steep fall in global share markets was triggered by concerns about the stability of the European financial system and a slowdown in China,” says Evans.

“That came shortly after May 2014 when a poorly received federal budget smashed confidence by 6.8 per cent.”

Evans says the May print is 8.4 per cent below the average seen in 2019, when consumer spending was generally described as lacklustre, essentially holding flat over the year.

“Consumer spending is much more buoyant over 2022 to date, as households respond to the reopening of the economy,” he says.

“This lift reflects a normalisation from the ‘low spending/high saving’ pattern seen during the COVID-19 restrictions and is being supported by a large reserve of excess savings accumulated over the past two years.”

The survey of 1,200 respondents was conducted over the week May 1 to May 5. Shortly before, on April 27, headline inflation was reported to have lifted above 5 per cent for the first time since 2007. Then, on May 2, the Reserve Bank of Australia raised the cash rate from 0.1 per cent to 0.35 per cent – the first time increase since 2010.

While headline inflation pressures may ease from this point, Evans says consumers are aware that the RBA plans to continue lifting the cash rate for some time. Westpac expects multiple increases through the remainder of the year with the cash rate peaking at 2.25 per cent in May 2023.

Westpac’s May survey found that 77 per cent of respondents expect mortgage interest rates to rise over the next 12 months, up from 70 per cent last month. More importantly, 52 per cent expect rates to rise by more than 1 per cent, up from just 34 per cent only one month ago.

Among workers, outright confidence levels are weakest for those working in hospitality, retail, construction, education, health, the arts and professional services. Those in mining, IT, telecommunications and media, wholesale trade and government are more positive.

The index picked up a sharp rise in concern about the near-term outlook for family finances. The “family finances, next 12 months” sub-index tumbled by 11.2 per cent to 93.3, in contrast to the “family finances compared to a year ago” sub-index which held steady, albeit at a relatively weak 79.6.

“The prospect of rising interest rates is clearly weighing on respondents despite the prospect of higher bank deposit rates,” observes Evans.

Assessments of the economic outlook also deteriorated. The “economy, next 12 months” sub-index was down 5.8 per cent to 90.4 and the “economy, next 5 years” sub-index fell by 4.1 per cent to 96.2.

The surge in prices continues to bite hard on attitudes towards spending. The “time to buy a major household item” sub-index was down by 5.7 per cent to 92.6.

“To put this into perspective, this is near the low seen during Victoria’s ‘second wave’ outbreak in 2020, when health concerns were discouraging shoppers, and, prior to the pandemic, the lowest read since the GFC,” says Evans.

“The current level of this sub-index is 27 per cent below its long-run average of 126.3.”

The sharp fall in confidence even spread to what have otherwise been very upbeat labour market expectations. The Westpac-Melbourne Institute Unemployment Expectations Index increased 10.5 per cent to 109.6, indicating that more respondents expect a rise in the unemployment rate.

But Evans says the index is still well below the long-term average of around 130 and remains a positive assessment of the labour market.

Not surprisingly, the prospect of rising interest rates is weighing heavily on confidence in the housing market.

“The ‘time to buy a dwelling’ index, which was already 40 per cent below its most recent peak in November 2020, fell a further 1.5 per cent in May,” says Evans.

“The index, which is principally affected by affordability, is now at its lowest level since April 2008 when, due to rising inflation, the RBA felt obliged to raise rates in both February and March despite the looming GFC.”

The outlook for house prices is also starting to deteriorate more rapidly. The Westpac Melbourne Institute Index of House Price Expectations fell by 9.4 per cent to 121.41.

Most respondents still expect house prices to rise over the next year – as indicated by an index read above 100. The latest read compares to the consistent sub-100 prints seen in 2018 and 2019 when house prices were correcting by 12–15 per cent in the Sydney and Melbourne markets.