‘Extreme’ consumer pessimism persists into 2024
Westpac’s index records the weakest January reading since the 1990s recession despite easing rate hike fears.
Consumer pessimism has carried into 2024 despite a “notable easing” in rate hike fears, according to the Westpac Melbourne Institute index.
The index declined 1.3 per cent to 81 points in January, marking the most pessimistic start to a year since the 1990s recession.
Senior economist Matthew Hassan said the result, almost 20 points below the “neutral” level of 100, meant last year’s “extreme” pessimism had continued into the new year.
“For consumers, the new year looks to have picked up where the old one left off,” he said.
“Australian consumers remain under intense pressure as the surging cost of living, materially higher interest rates and rising tax take weigh heavily on incomes.”
The index has been in pessimistic territory since March 2022, the longest streak since the 1990s downturn. Outside of that same period, the January reading was also the weakest one recorded for the month since the index began in the 1970s.
The continued pessimism comes despite a “notable easing” in rate rise fears, according to Mr Hassan.
After the RBA’s December meeting, which held interest rates at a 12-year high of 4.35 per cent, 60 per cent of consumers surveyed by Westpac said they expected the standard variable mortgage rate to increase over the following year.
That proportion came down to 52 per cent in January, the lowest since the RBA first paused its rate tightening cycle eight months ago in April 2023.
Mr Hassan said the change was due to an encouraging November CPI reading of 4.3 per cent and the expectations of rate cuts overseas.
But further “deterioration” in sub-indexes such as family finances and concerns about the economy’s medium to long-term prospects had offset these gains.
“Many consumers may be a facing a bigger than usual post-Christmas financial ‘hangover’ as the full impact of the higher cost of living on festive season spending becomes apparent,” Mr Hassan said, with the “finances compared to a year ago” sub-index dropping 7.6 per cent to 63 points.
The “economic outlook, next five years” sub-index also fell 6.1 per cent to 89.1 points, driven by pessimism among consumers in younger age groups and living in rental accommodation.
Additionally, the “time to buy a major household item” sub-index was largely unchanged at very weak levels, dipping slightly to 78 points.
Mr Hassan said it was unlikely the RBA would raise rates further, but a material rise in inflation could force the central bank into a “more finely balanced decision” despite sustained consumer pessimism.
“High inflation is still the RBA’s primary concern. As such the quarterly CPI release in late January will be critical to its policy decision in February. On balance, we expect the RBA to leave rates unchanged in February,” he said.
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