• Consumer sentiment rose by a small 0.2% in June but is 8.8% below year its year ago level
• Confidence is still being adversely impacted by the negativity around the Federal Budget.
• The positive news is that job security fears receded marginally.  The unemployment expectations index has now fallen for three months in a row, though consumer fears over job loss remain elevated.

The Westpac‑Melbourne Institute Index of Consumer Sentiment was largely unchanged over June.  Sentiment plunged in May following the Federal Budget and is sitting at its lowest level in almost three years.  There is a risk that prolonged weak consumer confidence negatively impacts on household spending and borrowing appetite.

There are many economic, social and political influences on consumer sentiment.  The state of the jobs market is one of the biggest influences on consumer confidence.  In that context, the recent pickup in employment growth and small fall in the unemployment rate would normally have produced a lift in consumer sentiment.  But improvements in the labour market have been overshadowed by the doom and gloom surrounding the Federal Budget.

The consumer response to the Federal Budget is quite clear – they don’t like it and confidence around family finances has fallen as a result.  In the six months to April, consumer spending growth picked up and the household savings rate fell marginally.  Both of these outcomes were a sign of improved consumer confidence.  And they were also both a positive sign for businesses and the Australian economy more generally.  There is a genuine threat to retailers from the big fall in sentiment since May.  This is compounded by warmer weather having delayed traditional seasonal purchases like clothes and household goods.

Looking through the detail reveals that three of the five component indices increased in June.  The largest increase was in family finances in the year ahead (+5.0%) and economy one year ahead (+3.0%).  These were partially offset by family finances year ago (‑5.4%) and economy five years ahead (‑2.3%).  The time to buy a major household item index rose by 1.0%.

The June sentiment release also contains quarterly estimates of consumer preference for the wisest place to put savings.  There were small lifts in the proportions of respondents preferring to pay down debt (17.3%) and invest in equities (9.9%).  Conversely, there were small falls in the proportions of those preferring bank deposits (27.5%) and real estate (24.5%).  The responses are generally reflective of consumer caution, although the proportion of respondents favouring real estate indicates that there is still a reasonable degree of optimism around the housing market.  In addition, the trend down in those preferring bank deposits suggests that consumers are a little less risk adverse.

The Westpac‑Melbourne Institute unemployment expectations index was also published yesterday. It was the main positive in yesterday’s figures and showed that fears over job losses receded marginally over the month.  Notwithstanding, concerns over job security remain elevated.

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