WESTPAC: The Budget And Political Uncertainty Will Dissipate - Slowly

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Westpac’s consumer sentiment index was “disappointing”, according to the banks’s chief economist, Bill Evans.

The impact, according to Evans, has been that, “The balance of partial indicators suggest that growth momentum in the Australian economy has slowed markedly over the last three months since the lead up to the Federal Budget.”

It is a situation that has led the market to price in a 50% chance of an RBA rate cut.

But like the ANZ, which said on Friday there was a less than 10% chance of another rate cut at the moment, Evans wrote in his weekly commentary that:

“Current pricing stands in sharp contrast with our own expectations of rates firmly on hold over the next 12 months, with two rate hikes in August and November next year”.

A big part of this view is predicated on a recovery in the crash of consumer sentiment since the Federal budget.

All-time high!

Evans noted that, “In Figure:1, we show the proportion of respondents in the Westpac Melbourne Institute Consumer Sentiment survey who recalled news items on the Budget. June 2014 recorded the highest level of recollection for Budget/Taxation in the history of the survey.”

So the fall in sentiment is understandable, according to Evans. Equally though, he says: “The key to a recovery in momentum in the economy will be a solid recovery in the Index as concerns around the Budget dissipate.”

Evans says that while the the recovery has been disappointing so far, it will happen and highlights that households “have been overestimating the near-term severity of this budget.”

He also notes that around “$24bn of the $36bn” of the budget savings are likely to be opposed by the Senate.

All of which means that even though the impact of political uncertainty on consumers is “difficult to call”, Evans says both consumers and the RBA will be patient.

“On balance, we favour a gradual improvement in confidence and an associated recovery in marginal momentum for the consumer and housing. We expect households will look through the political turmoil whilst also appreciating that the severity of the Budget measures has been overestimated.

We expect that the Reserve Bank will be similarly patient, expecting the consumer to gradually lift its confidence and restore a more solid pace of spending, including a lagged boost to housing.

If that profile prevails, then business will lift employment and non mining investment, adding to the underlying support given by rising housing investment. In turn, market pricing is likely to move back towards its late April stance.

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