Australia sees deterioration in consumer sentiment amid high inflation

Highlights

• The Westpac-Melbourne Institute consumer sentiment index stood at 100.8 points in February.
• The rise in supply-chain disruptions had a negative impact on the overall outlook for consumers and businesses.
• The report suggests that one in four individuals believes that interest rates will rise by more than one percentage point this year.

The latest data released by the Westpac-Melbourne Institute reveals that their consumer sentiment index fell by 1.3% in February. The index now stands lower at 100.8 points in February after being measured at 102.2 in January 2022. The fall in consumer sentiment was an unexpected one, as experts predicted some pandemic related pressure to ease off as the year progresses.

Consumer sentiment numbers started to dwindle since the beginning of 2022, majorly due to the widespread uncertainty pertaining to the Omicron variant. However, disappointing figures in February highlight the fact that inflationary pressures have seeped into household spending, urging consumers to take a break from their buying habits.

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The report from Westpac showed that the components of the index that measure respondents’ assessments of their finances deteriorated in February. However, the economy-related components brought some optimism, with the economy next 12 months’ sub-index increasing by 2.4% and the economy next 5 years’ sub-index rising by 1.5%.

Inflationary pressures in the backdrop

Omicron-related disruptions have created elevated pressure on finances, making the situation precarious for households. The cost of raw materials has notably increased, reducing the profit margins for businesses. Petrol prices surged by 8% over the last month and by 15% over the last two months. Additionally, CPI data highlighted a broader overall upliftment in prices since mid-2021.

These details reflect the significant impact rising supply-chain disruptions have had on the overall outlook. Increasing raw material costs faced by businesses have translated into rising prices for the economy. Meanwhile, housing and building-related costs have also risen significantly, directly affecting consumers’ expectations. 

The report by Westpac further highlighted that the ‘finances vs a year ago’ sub-index was weaker for younger age groups, renters, retirees, and those on very low incomes. All these categories tend to be more sensitive to price changes, specifically for the consumer staple goods. The ‘finances vs a year ago’ sub-index declined by 9.2% in February.

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Interest rate hike expectations

Given the ongoing economic scenario, speculations are rife that the Reserve Bank of Australia (RBA) could raise interest rates by the end of 2022. The recent data is also in line with these expectations, as the proportion of respondents expecting a mortgage rate hike over the next 12 months rose steeply from 55% in January to 66% in February. This effectively translated into every one in four consumers believing that interest rates will rise by over one percentage point. 

Interest rate hike expectations have been dominating the market amidst strong labour market conditions. The Westpac Melbourne Institute Unemployment Expectations index plummeted by 8.7% on the back of robust employment data seen throughout the end of 2021.

Overall, it is hard to ascertain the complete effects of an interest rate hike at such an early age. However, experts are hopeful that a rate hike may not arise before August this year. 

Home buyers’ expectations

Housing price expectations strengthened last month, moving strikingly opposite to the buyer sentiment for housing. The Westpac Melbourne Institute Index of House Price expectations recovered 8.7% in February, with rising expectations across all states. 

Home buyers’ expectations for the coming months are majorly stemming from two factors, namely interest rate hikes and inflationary pressures. A mix of these factors presents a relatively undesirable outlook for property buyers, as evident in the ‘time to buy a dwelling’ index, which fell 2.4% during the month. This was heavily influenced by actual and prospective affordability.

Following months might bring some affordability back into the market, given a slowdown in property prices over recent months. However, much depends on how the Omicron wave will take shape, given the uncertainty around the termination of the new virus outbreak.

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