‘UNSETTLING FOR THE RBA’: Australian consumer sentiment tanks

  • Australian consumer sentiment fell by the most in over three years in January, according to the latest Westpac-MI survey.
  • Sentiment on the economic outlook and family finances was particularly weak, as were views on home prices.
  • Westpac says the result will be “unsettling for the RBA”.

Australian consumer sentiment fell heavily this month, registering the largest monthly decline in over three years.

The Westpac-MI index fell 4.7% to 99.6, the first sub-100 result since November 2017.

A reading below 100 indicates that pessimists outnumbered optimists in the latest survey, albeit by a slim margin.


“The January sentiment fall is significant,” said Matthew Hassan, Senior Economist at Westpac.

“January reads should be treated with some caution as the Index is adjusted to remove a regular boost to sentiment over the holiday season. However, even allowing for this, the update clearly marks a poor start to the new year.

“The Index is down 5.3% compared to this time last year.”

Westpac said the decline in sentiment was broad-based with all survey components weakening from December, led by a deterioration in views on the
economy and current finances.

“On the economy, the ‘economic outlook over the next 12 months’ sub-index dropped 7.8%, the biggest fall since September 2015 when sentiment was hit by a sharp sell-off in financial markets and a disappointing update on Australia’s growth,” Hassan said.

“The ‘economic outlook over the next five years’ sub-index also showed a sizeable 5.9% decline.”

Despite the steep monthly declines both readings remain above the surveys long-run average, even though a majority of Australians still have a negative take on where the economy is heading.

Hassan said similar falls were also recorded towards view on family finances, indicating that pressure on household budgets is increasing.

“Consumer views on family finances also recorded a poor start to the year,” he said.

“Pressure on family finances remains a key weak spot for sentiment with both subindexes well below long run average levels. Slow wages growth and falling house prices remain significant headwinds.”

The final sentiment component — whether now was a good time to buy a major household item — registered a milder decline of 1.3%.

However, Hassan says sentiment towards spending remains weak, pointing to a continuation of soft household consumption in the period ahead.

“The weak reads around family finances pointing to a continuation of the sluggish consumer spending growth seen through 2018,” he said.


Helping to partially explain the decline in sentiment towards household finances, the unemployment expectations index rose 2.2% following a small 0.5% rise in December, indicating that more respondents expect unemployment will increase over the next 12 months.

“At 123.6, the index points to job loss fears well below the historic average of 130,” Hassan says. “However, the shift in recent months suggests some of the strong momentum evident in labour markets through much of last year is easing.”

Weakening house price outlook

Sentiment on home prices also weakened, a result perhaps explained by an acceleration in the speed of market declines in Sydney and Melbourne during December.

“The house price expectations index fell 4.1% to 95.9 in January, marking a new cycle low and the weakest read since we began compiling this index in May 2009,” Hassan said, noting the weakness remains “heavily concentrated in New South Wales and Victoria”.

“Price declines are becoming firmly entrenched in expectations in these states with nearly three quarters of consumers expecting prices to be unchanged or lower by this time next year.”

In contrast to views on the outlook for prices, sentiment towards whether now was a good time to buy continued to improve, hitting the highest level in four years on the back of improved views from respondents in New South Wales and Victoria.

“The ‘time to buy a dwelling’ index rose 4.1% in January to be up 7.7% over the year,” Hassan said.

“The state detail continues to show a clear improvement in buyer sentiment in Sydney and Melbourne from the very weak reads in 2017.

“This suggests the more substantive price declines in these markets has seen some easing in what were acute affordability pressures 12–18 months ago.”

While that would normally suggest that demand for housing in those locations is likely to improve, Hassan cautions that may not be the case this time around.

“Ordinarily, the lift in buyer sentiment would be pointing to a lift in owner occupier demand. However, the tightening in lending standards evident over the last year may mean prospective buyers find it more difficult to secure finance.”

He also notes the deteriorating sentiment on house prices could see demand weaken as prospective buyers hold off purchasing in anticipation of even lower prices.

On top of weak household consumption in the September quarter, along with anecdotal evidence that retail spending was weak in the lead-up to Christmas, Hassan says today’s result will not be welcomed by policymakers at the Reserve Bank of Australia (RBA).

“The weakening in consumer sentiment will be unsettling for the RBA given its concerns about downside risks to the outlook for consumer spending,” he said.

“With the disappointing September quarter national accounts update materially lowering the starting point for growth and consumer momentum looking softer, the Bank is likely to lower both its 2018 and 2019 growth forecasts (in its February Statement on Monetary Policy].

“We expect this tempered view on growth to also temper the Bank’s attitude towards rates. Westpac continues to expect rates to remain on hold in 2019 and 2020.”