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  • 29 Jul 2016

Future Looks Bright Despite Consumer Sentiment Index Drop

According to Westpac chief economist Bill Evans, past performance is not a reliable indicator of future performance, and Australians have every reason to feel positive.

Speaking on the release of the Westpac Melbourne Institute Index of Consumer Sentiment, Mr Evans also suggested that the Reserve Bank would cut interest rates again following its meeting on August 2.

The Index fell by 3.0 per cent to 99.1 points in July, from 102.2 points in June. But Mr Evans said the downturn was to be expected.

"With the major events of ‘Brexit’ and prolonged election uncertainty, it is not surprising to see a fall in the Index. In fact, given these developments, this fall appears to be surprisingly modest.

"The survey was conducted over the period July 4 to July 7. By the time of the survey market volatility associated with ‘Brexit’ had largely settled down and media commentary was, correctly in my view, concentrating on the implications for the UK economy rather than the initial reaction which speculated on some disastrous contagion for the whole of Europe. However concerns would have lingered for many respondents given the blanket publicity which the ‘Brexit’ development received.

"On the other hand election uncertainty persisted throughout most of the survey period. Respondents would have been particularly unnerved about the prospect of an inconclusive election result given the experience during the last ‘hung’ Parliament in 2010 to 2013.

"Consequently, to see the Index fall by only 3%, back to its level of March 2016 and still 4.2% above its April level is encouraging. Since the end of the survey period we have seen some welcome political certainty with the prospect of a hung Parliament avoided. It is reasonable to speculate that had the survey been conducted over the last few days the results would have been more positive.

"Furthermore, we expect the Reserve Bank to move to cut rates again following its meeting on August 2. Following the cut in May the Index surged by 8.5% putting it firmly in positive territory above 100, indicating optimists outnumber pessimists. With the Index currently poised only slightly below 100 we can be reasonably confident that the Index will be back above a 100 next month."

The Westpac Melbourne Institute Index of Unemployment Expectations rose 1.9% in July but the Index is still 4% below its level in April and, most importantly, 8.0% below its level of a year ago, indicating a steady improvement in the labour market.

Signals in the housing market were mixed. Although the ‘time to buy a dwelling’ index fell by 1.8% to 101.8, there has been no sign of further deterioration in 2016. Respondents are regaining their confidence in the outlook for prices.

The Westpac Melbourne Institute Index of House Price Expectations lifted by 4.3% in July to its highest level since August last year and up around 17.3% on the average of the last quarter of last year.

"The Reserve Bank Board next meets on August 2. We expect that it will decide to further reduce the overnight cash rate to 1.5%. This will follow the decision to lower rates by 0.25% at its Board meeting in May. Westpac had not expected that move because we underestimated the significance which the Board had read into the March quarter inflation report. On the basis of that report the Board lowered its forecasts of underlying inflation in 2016 from 2.5% to 1.5% and in 2017 from 2.5% to 2.0%," Mr Evans concluded.