Australia just got some worrying news on the outlook for consumer spending

After recording the largest weekly rise on record in the previous week on the back of a change in Australia’s political leadership, Australian consumer sentiment eased last week with the ANZ-Roy Morgan index slipping 3.4% to 110.6.

While the index is still up 5% from two weeks ago, the decline took sentiment back below its long run average of 112.7.

Expectations on the economic outlook declined following the enormous jump in the previous corresponding week. Confidence in the economy over the next year declined by 7.5%, having surged 25.8% previously, while confidence out five years fell by 1.5%. Previously it had gained 13.4%. Elsewhere gauges on family finances, both compared to last year and in the year ahead, fell by 2% and 2.8% respectively.

Surprisingly, and perhaps worryingly given the need for increased household consumption to help power economic growth, the only subindex to fully retrace its gain was whether now was a good time to buy a major household item. The subindex fell 3.6% to 118.7, the lowest level since May 2009.

The movements in the survey’s individual components can be found below.

  • Financial situation compared to a year ago: 107.7 (-2.0%)
  • Financial situation next year: 123.0 (-2.8%)
  • Economic conditions next year: 95.1 (-7.5%)
  • Economic conditions next five years: 108.4 (-1.5%)
  • Time to buy a major household item: 118.7 (-3.6%)

According to Felicity Emmett, co-head of economics at ANZ, the partial retracement in sentiment should not have come as a surprise given the challenges facing Australian households at present.

“A partial reversal in confidence this week is not surprising given the record bounce in the previous week in response to the appointment of Malcolm Turnbull as the new Prime Minister. While Turnbull’s appointment was greeted with considerable optimism, the challenges facing Australian households remain front of mind and make it difficult to sustain a lift in confidence.

We continue to think that the new government needs to focus on two key planks of economic policy, both medium and long term in nature. Firstly, they need to get the government’s finances in order. Secondly, they need to present a vision for Australia’s economy and reform agenda.

While pursuing these objectives will put the Australian economy on a solid footing in the medium term, it may come at the cost of growth in the short term. Hence, even if business and consumer confidence can build over the coming weeks, we doubt it will be enough to move the dial on the economy. As such, sub-par economic growth and a softening property market will likely see the RBA cut rates further in 2016.”

Though ANZ are at odds with the vast majority of analysts who believe the next move in interest rates will be higher, not lower, after an extended pause from the RBA at current levels, the decline in whether now is a good time to buy a major household item is particularly concerning, especially given the need for household consumption to improve in order to offset a continued drag on economic growth from the unwinding mining capital expenditure boom.

Should the sentiment expressed by survey participants filter through to retail spending in the quarters ahead, the impact on growth may see others joining ANZ in the RBA rate cut camp in the months ahead.

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