Consumer confidence slips despite cheaper petrol, rate cut hopes

Jens Meyer
February 3, 2015
Consumer confidence has slipped slightly despite cheaper petrol prices and the prospect of another rate cut, which ANZ says is due to rate cuts not providing the same boost to sentiment as in past cycles amid a plethora of other worries.
The weekly ANZ-Roy Morgan consumer confidence index fell by 0.7 per cent to 112.4 in the week ending February 1. This follows a drop of 0.4 per cent the previous week and leaves confidence around its long-run average.
“The response of confidence to rate cuts is now the weakest of the last five easing cycles with concerns around the federal budget, the economic outlook, and job security weighing on sentiment in 2014,” ANZ chief economist Warren Hogan said.
“However, the initial response of confidence to rate cuts was closer to normal, with the added cash flow from lower rates and higher house prices providing a moderate boost to sentiment. This suggests that further rate cuts could provide some boost to confidence in coming months.
Remarkably, lower petrol prices hadn’t yet boosted local confidence in any significant manner, which was in contrast to the US, ANZ said.
“While this may reflect a lagged response from Australian consumers, it could also indicate that a strong labour market in the US is helping support confidence, whereas in Australia labour market conditions remain a hindrance to confidence,” Mr Hogan added.
Economists have calculated that the recent slide in the petrol price was worth as much as two rate cuts for consumers.
Deutsche Bank in a note last week said households had received a $7 billion boost from cheaper petrol.
“That’s equivalent to more than 50 basis points of rate cuts, or roughly 2 per cent of retail trade and one-third the size of the Rudd government stimulus payments,” the bank said.
But Deutsche conceded that Australians were unlikely to spend the extra money on big-ticket items as consumer confidence remained stubbornly weak and the estimated $15 benefit per family was too small.
Ahead of today’s key RBA meeting, Mr Hogan said, the key challenge for the RBA was to communicate a possible rate cut in a positive light, so as to not further damage ‘animal spirits’ in the economy.
“The RBA can do that by emphasising that lower petrol prices provide both extra cash flow to consumers and businesses, as well as a lower inflation trajectory which gives the scope to lower interest rates,” he said. “As such, this extra push to the economy should see growth accelerate back to trend in 2016 and 2017.”
Two weeks ago, the more widely-watched monthly Westpac-Melbourne Institute index of consumer sentiment rose 2.4 per cent to 93.2 for January, but this came after a sharp 5.7 per cent drop in December. And it was still well below the 100-point level, indicating that pessimists outnumber optimists.