WESTPAC: This Number Shows Australians Fear The Budget Impact, But They'll Eventually See It's Not That Bad

For Australians to have a poor opinion of the federal budget is one thing. But for it to hurt people’s view of the future to the point where it produces a hard economic impact, such as a drastic reduction in consumer spending – is a whole other potential headache for the government. And the country.

The Westpac-Melbourne Institute consumer sentiment survey, out today, showed consumer confidence is now at its lowest since 2011, when the RBA began cutting interest rates.

Here’s the table that showing the 23-point fall in expectations around family finances in the coming year. It’s the lowest number in the history of the survey.

It’s a horrible follow-up to the pasting the government took in the polls published on Monday.

There are three important points to note, though.

First, dives in consumer sentiment are not unusual following a budget. The 2010 budget saw an even bigger fall in the headline number, and there were dramatic falls in 2006 and 2009 as well.

Second, as Westpac’s chief economist Bill Evans points out, the immediate budget impact on the overall economy is tiny. It’s only $1.7bn, or 0.1% of GDP, in 2014/15. The major savings don’t kick in until 2017-18 – after the next federal election.

Evans writes: “Over time households will recognise this strategy and it seems unlikely that the Budget will derail this recovery in the face of a strong lift in household wealth (around $700bn) associated with recent house price increases; a very high household savings rate which is supporting a substantial strengthening in household balance sheets; and very low interest rates that are likely to remain in place until the second half of 2015.”

The UBS economics team echoed this in a note out a short time ago:

“… we wonder how the 1-year outlook could now be worse than any point in 40 years – with a proposed budget tightening only ~1/3 of 1996, GDP growth only moderately below-trend, record low interest rates, and unemployment below 6% (indeed unemployment expectations were less negative). While at face value the data suggests a disaster for retail sales, the overall 7% m/m fall was the same as last year’s budget. The current level of sentiment still suggests moderate consumption growth ahead, but how much confidence bounces is key for the outlook – given record low wages growth means some further fall in the savings rate is needed to boost spending.”

So, there’s still some risk if the consumer sentiment is converted into real reductions in spending as families hoard cash, bracing for the budget impact. But the fundamental buffers in low interest rates and low unemployment remain.

Finally, while the short-term numbers are a worry for the economy, one number should be flashing in red lights for the government: the survey showed a dramatic lift in optimism about economic conditions over the next five years.

This speaks to a core part of the political messaging – that some decisions are required now, in order to secure the future. Joe Hockey and Tony Abbott might take some comfort in the fact that this appears to have clicked.

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