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GOLDMAN SACHS: Here's Why The Post-Budget Sentiment Fall Is Terrible For Australia's Economy

Consumer sentiment has dropped in Australia (Photo: Getty Images)

Goldman Sachs has delayed its rate cut prediction from July to September this year, saying further monetary accommodation is required – in large part due to the Federal Budget.

The bank expects a “robust” GDP figure for the first quarter of the 2014 financial year.

But this is driven by “prior strength in exports, consumption and dwelling investment together with what appears a temporary hiatus in the long fall in investment spending.”

Goldman’s in-house current activity index predicts growth momentum has slowed materially in 2Q14. Financial conditions have also tightened and there has been an “audible snapping” in consumer sentiment since the budget was released in May.

“These developments risk compounding the 1.25% hit to cash income of households from existing government policies in 3Q14.

“We have delayed our forecast rate cut of 25bps from July to September as the economic impact of the shifting policy and economic landscape is assessed,” Goldman’s note says.

These charts show just how bad the budget reaction was.

Consumer sentiment — which gauges how likely Australians are to spend money — has fallen around 16% September last year — when the federal election was held.

This one cuts deep for the “no surprises government”. Sentiment fell to the lowest level ever recorded for a budget month in May this year.

Goldman says it is safe to assume the plummet in sentiment will come back a bit once the shock fades. But it has been on a downward trend for the past six months. This, Goldman says, appears to be a key risk to recent momentum in retail sales.

For an economy that is heavily reliant on the consumer spending to be a key driver of the broader non-mining recovery the shock to confidence is disconcerting. Indeed, consumer confidence is at a level that is now well within the rate cutting zone for the RBA in prior economic cycles.

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