Confidence dives ahead of Christmas despite rate cut

Consumer confidence has taken an unexpected dive ahead of Christmas, down by 4.1% to a neutral point of 100.0, according to the Westpac Melbourne Institute Index of Consumer Sentiment.

The measure, which is intended to indicate consumer’s propensity to spend, continues to be topsy turvy, with the drop following a similarly large increase of 5.2% in November.

Westpac’s chief economist, Bill Evans, says the drop, which came despite last week’s rate cut, is a very surprising result. “When we saw the 5.2% increase in the Index in November, which came despite the Reserve Bank surprising by holding rates steady, it appeared that sentiment was finally starting to respond to the accumulated series of rate cuts since November last year,” Evans says.

“With that in mind it was therefore reasonable to expect that the Index would respond quite positively to the rate cut the Reserve Bank delivered last week. Instead the Index fell back to near its October level and is now 3.2% below its November 2011 level.”

The rate cut did have an impact on mortgage holders whose confidence rose by 4.4%, but renters and outright owners of properties were very downbeat. Confidence of those who are renting fell 9.1% while for those who wholly own their property confidence was down 10.9%.

The survey also tracks major news events and their influence on confidence. It found the news items which had the largest impact were around economic conditions, with 60% of respondents recalling news items on the economy, while only 28.9% recalled the news of interest rate cuts, and 20% or less recalled stories around budget and taxation, international economic conditions, inflation or employment.

“Respondents continued to view news as quite negative around economic conditions,” Evans explains. “Apparently the fall in headline unemployment from 5.4% to 5.2% which was announced during the survey week had limited impact on respondents.”

December’s rate cut did boost the perception that now is a good time to purchase a house, with the index tracking sentiment on this measure improving to its highest level since September 2009, a year in which Australian house prices increased 14%.

Respondents to the survey, conducted between 3 and 9 December, were more confident around the outlook for their finances – the only sub-index the register an increase – while perceptions of finances compared to a year ago, economic conditions over the next twelve months and next five years, and whether now is a good time to purchase a major household item all fell.

Evans predicts another rate cut when the Reserve Bank Board next meets on February 5. “Evidence to date is that low rates are not generating much traction with households. Hence there is likely to be a decision to further ease rates in February or March”, he says.