A confidence killer for Australian households

Declining consumer sentiment is no longer a hangover from the budget, but a sign that households will be poorly placed in the second half of 2014. A shift in the public's mood is unlikely unless the Senate blocks the budget's proposals.

The budget continues to weigh on consumer confidence, with measures of consumer sentiment rebounding only modestly in the past two months. Rather than representing a temporary overreaction to the budget, which has occurred in the past, it is becoming increasingly obvious that households are poorly placed as we enter the second half of 2014.

The Westpac-Melbourne Institute consumer sentiment measure rose by 1.9 per cent in July but the modest rebound has been disappointing to date. It recovered only a small portion of the 6.8 per cent decline in May. The results are broadly consistent with the weekly ANZ-Roy Morgan measure of consumer confidence.

Consumers reacted strongly to a budget that featured a range of unpopular measures that slashed welfare and increased the costs of education and healthcare. It is not unusual for households to have a strong reaction to the budget -- and normally it is quite negative -- but typically sentiment has rebounded quite quickly.

By Australian standards, this budget was a bit different. It was the first budget that addressed our long-term fiscal challenge, implicitly recognising that it was no longer possible to run a surplus without shared sacrifice. It was not an easy budget to spin.

Unfortunately, shared sacrifice turned out to mainly refer to the young and low-income earners; two groups who are particularly sensitive to changes in their income. These groups were sacrificed so that the Coalition could wind back the mining and carbon taxes, while introducing Prime Minister Tony Abbott’s unpopular paid parental leave scheme.

The result was a storm of resentment across the country, which has seen Abbott’s popularity plummet. If that was the end of it, then it would be no big deal, but declining sentiment is having a very real effect on household spending.  

Retail sales fell by 0.5 per cent in May, which was the second consecutive monthly decline in spending (A household spending slowdown is squeezing the economy, July 3). It might simply be a coincidence but spending began to decline around the time that content in the budget began to leak.

Household spending was already primed to soften, with growth running at an unsustainable pace throughout the second half of 2013. But spending slowed a little quicker than I initially expected. The federal budget appears to be the straw that broke the camel’s back.

Only a few months ago, markets were talking about when the Reserve Bank of Australia would raise rates. Recently I shifted my outlook from an easing bias to advocating one before the end of the year (How the RBA got it wrong on rates, June 16). The market is now pricing in a 46 per cent chance of a rate cut by March next year.

Graph for A confidence killer for Australian households

Household spending is poised to fall sharply in the June quarter and business investment and government spending is set to also be weak. Exports, the primary driver of growth in the March quarter, declined significantly in both April and May. The economy is set to contract in the June quarter for the first time since March 2011.

Australian markets will shift their attention towards labour market figures tomorrow, which could have a significant impact on cash rate expectations. Combined with housing finance data, released on Friday, and we should have a better feel about household conditions by the end of the week.

Although it rose modestly in July, consumer sentiment remains subdued and broadly consistent with household spending. The budget spooked Australian households which, combined with soft employment and declining real wages, has encouraged a more cautious approach. Unless the Senate successfully blocks these budget proposals, I suspect sentiment will remain at a fairly low level for some time.