Bill Evans, chief economist at Westpac, has released his monthly consumer sentiment report for June.
Consumer sentiment rose by 2.7% to 81.3%, but “remains at the deeply pessimistic levels that have prevailed for just over a year now”.
“The Index plunged 17% over the first half of 2022 and has barely budged since then, holding in the very weak 78-86 range. Even with the latest modest lift, the Index is still firmly in this range and 3% below its level of a year ago”.
“The main drags on sentiment throughout this period of depressingly low consumer sentiment have been the surging cost of living and sharply higher interest rates”.
Evans notes that consumers expect the RBA to continue hiking interest rates, which will continue to restrain sentiment:
“Consumers are slightly more hawkish on the interest rate outlook than they were during the RBA’s previous pause”.
“Back in April, just over 23% of consumers surveyed after the RBA decision expected rates to be unchanged or lower over the following 12 months, while just over a third expected rates to increase by 1% or more”.
“Despite rates being 0.5% higher in July, only 14% of consumers expect rates to be unchanged or move lower while 41% are bracing for a further big rise”.
“In summary, the responses suggest consumers are still clearly very nervous about the outlook for interest rates, particularly with the previous pause in April having been a ‘false dawn’”.
“The key message is that sentiment is probably not going to stage a sustained lift from current deeply pessimistic levels until inflation is much lower and interest rates are firmly on hold”.
Despite interest rate expectations remaining hawkish, households are bullish on house prices, with house price expectations surging by 45% since February.
“Consumer expectations for house prices continue to lift. The Westpac Melbourne Institute House Price Expectations Index lifted by 1.8% to 149.3 – optimists outnumbering pessimists by more than five to one”.
“The index has surged by 45% since February, although expectations appear to have stabilised at very high levels over the last three months”.
Bill Evans now expects the RBA to hike the official cash rate “by 0.25% at both the August and the September Board meetings before a long pause”.
“The first rate cut in the subsequent easing cycle is expected next May”.
