Bulletin

12 October 2011

Consumer Sentiment up slightly

The Westpac Melbourne Institute Index of Consumer
Consumer Sentiment
130 120 110 100 90 80 70
Sources: Westpac Economics, Melbourne Institute

Sentiment increased by 0.4% in October from 96.9 in September to 97.2 in October.

index

index

130 120 110 100 90 80 70 60

There have been a number of conflicting signals since the last survey that made the print for October particularly difficult to forecast. These conflicting forces probably explain why Sentiment hardly moved in October. On the downside, financial markets were again unsettled with sharp falls in both the sharemarket and the Australian dollar. In the period after the September survey the AUD fell from around 106 US to around 94 at the beginning of the survey week. Global equity markets were also weak with the Australian sharemarket falling by around 8% between surveys. However, on the positive side we saw a marked change in the rhetoric of the Reserve Bank. After discussing the option of raising interest rates as recently as August the Bank reported that it had adopted an easing bias at its October Board meeting. That announcement, which was reported in the media on the third day of the six day survey period, received extensive coverage and would have further eased the concerns of many respondents around interest rates. There was also a strong rally in both equity and currency markets from the third day of the survey with equity prices up by nearly 7% and the AUD recovering from 95 US to 98. Overall, however, the Index remains quite weak. It is 16.9% below its level of a year ago and 6.8% below the average for the first half of 2011. It is consistent with the Australian consumer remaining pessimistic. The fall in the Australian dollar had a significant impact on sentiment towards buying a major household item, falling by 5.6%. We have long been of the view that the ongoing positive sentiment towards major purchases was more reflective of strong affordability associated with the strong currency than an actual intention to buy. All other components of the Index showed modest gains with the sub-indexes tracking the outlook for economic conditions over the next 12 months up 0.9%; the outlook for the economy over the next 5 years up 4.1%; the state of family finances relative to a year ago up 2.3%; and the state of family finances over the next 12 months up 3%. Most of these components would have benefitted from the improved outlook for interest rates. The picture was less positive on the other time to buy indexes with views on time to buy a dwelling down by 10.4% and on time to buy a vehicle by 1.6%. The movement in the housing index largely reversed the surprise 15.1% jump in that index last

60 Oct-89

Oct-93

Oct-97

Oct-01

Oct-05

Oct-09

month while the affordability factor associated with the Australian dollar may have impacted the motor vehicle index. Both time to buy indexes remain in positive territory though close to their 10yr averages. The Reserve Bank Board next meets on November 1. We were pleased to see a considerable softening in the Governors rhetoric in his last Statement following the decision to hold rates steady in October. He noted, An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary. When central banks make such statements a rate cut is a reasonable possibility. On July 15 Westpac signalled a likely rate cut by the Board meeting in December. That remains our call while noting that the possibility of a move in November is quite real. Bill Evans, Chief Economist +61 (2) 8254 8531

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