Australian consumer sentiment is sliding

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Australian consumer sentiment fell heavily in January, led lower by renewed concerns over the outlook for China’s economy and volatility in financial markets.

The latest Westpac-MI consumer sentiment index slid 3.5% to 97.3, taking the index back to levels last seen in September 2015.

At 97.3, the index indicates that pessimists now outnumber optimists, something that has occurred in 20 of the past 23 surveys.

Despite the monthly drop, the index still remains 4.3% higher than the levels of a year earlier.

“With limited domestic news during the holiday season consumers appear to have been mainly impacted by the spate of negative news on the international front and the spill over effect on financial markets,” said Bill Evans, chief economist at Westpac.

Evans suggests that steep falls in global share markets – including a 7.6% decline for Australia’s ASX 200 – along with volatility in Chinese financial markets, were the chief catalysts behind the deterioration in sentiment.

A slight uptick in the survey’s unemployment expectations index, rising 0.7% to 142.7, may have also weighed on sentiment. A higher reading indicates an increase in concern over the outlook for unemployment.

“Not surprisingly these concerns have weighed most heavily on how respondents assess their own financial position,” said Evans.

“The component of the index tracking views on ‘family finances versus a year ago’ dropped by 9.4% to be at its lowest level since July last year. The component tracking expectations for ‘family finances over the next 12 months’ fell 2.3%.”

Outside of family finances, the other components of the index came in mixed.

Sentiment towards economic conditions over the next 12 months fell by 5.0%, partially offset by a 0.3% increase in that over the next five years.

Like the separate ANZ-Roy Morgan consumer confidence index released yesterday, the gauge on whether now was a good time to buy a major household item slid 1.7%.

The full breakdown of the survey’s five subcomponents, along with unemployment and house price expectations, can be found in the table supplied by Westpac below.

While the decline in overall sentiment was expected given the start to the year for financial markets, there was an unexpected surprise when it came to sentiment towards residential property market.

The gauge on whether now was a good time to buy a dwelling rocketed higher, jumping 13.9% to 113.0, taking the gauge back to levels last seen in May last year. Improved sentiment towards the New South Wales property market was largely behind the increase.

“The sharp increase in the Index in January will reflect some seasonality but the move is so large that we can only conclude that this print may be signalling some improving optimism in the housing market,” said Evans.

Like the reading on whether now was a good time to buy a dwelling, the separate house price expectations index also rocketed higher, jumping 21.1% to 125.8 during the month. Despite the massive increase, the index remains down 10.2% from January 2015.

Given the recent ructions in the stock market, one has to wonder whether that contributed to the sharp bounce in housing market sentiment during the month. Safe as houses, as the saying goes.

In terms of implications for monetary policy, Evans suggests there’s little from the report.

“Despite markets confidently expecting that the Reserve bank would cut rates by February Westpac has remained firmly of the view that the Bank will remain on hold throughout the second half of 2015 and the whole of 2016,” said Evans.

“We retain that view despite some concerns from this survey that consumers may slow their spending in response to this current global uncertainty.”

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