The Westpac-Melbourne Institute Consumer Sentiment Index fell 5.7% in December from 96.6 in November to 91.1 in December.
The most telling part of the release this morning may not be the result itself but rather the impact it has had on Westpac Chief Economist Bill Evans who felt compelled to open with, “This is a very disturbing result”. These six words convey the sharp deterioration in sentiment and, with the index at its lowest level since August 2011 and before that May 2009, the malaise in which consumers find themselves.
In the run up to Christmas Evans said that the components of the index are pointing to a softening in spending:
With one exception all the components of the index were down: the sub-index tracking views on ‘family finances vs a year ago’ rose 1.6% but ‘family finances, next 12 months’ was down 4%, ‘economic conditions, next 12 months’ fell 9.7% and ‘economic conditions, next five years’ was down 1.8%.
Evans notes that there has also been a collapse in the “time to buy a major household item” sub index which crashed 11.8% from 124.2 to 109.6. Strikingly he said this component is “now 21.4% below its level of a year ago and has reached its lowest level since April 2009. This is a particularly awkward time for respondents to feel so downbeat about purchasing major items given that it comes in the critical lead up weeks to Christmas.”
In the context of where the Australian and global economies were in April 2009 this is a terrible lead on where the Australian economy is, or at least where consumers heads are at, as we head into 2015.
Evans is forecasting rate cuts next year and has doubled down this morning, saying “In a world where other developed economies have near zero interest rates and, accordingly, the Australian dollar is overvalued, Australia should seize the opportunity to provide further interest rate relief to the economy and exert some more downward pressure on the Australian dollar.”
The RBA will have little choice.