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Rate hike fears sink consumer mood, SMEs see silver lining

New surveys from Westpac and National Australia Bank (NAB) reveal a stark contrast between Australian consumer sentiment and business confidence.

Australian consumers continue to grapple with deep pessimism, exacerbated by the looming threat of further interest rate hikes. Westpac’s latest consumer sentiment survey, released Tuesday, shows a 12.8% jump in expectations for variable mortgage rates over the next 12 months—marking the steepest rise since the question was first asked in early 2022.

“Sentiment remains stuck in the same deeply pessimistic range that has dominated for two years now,” said Westpac senior economist Matthew Hassan. “Fears of persistent inflation and further interest rate rises are again weighing heavily on the consumer mood, offsetting any boost from the arrival of stage three tax cuts and other fiscal support measures.”

Despite the introduction of these measures on July 1, many consumers have not yet felt their impact due to varying payment cycles. The survey found nearly 60% of consumers expect mortgage rates to rise over the next year. With the Reserve Bank’s next meeting on August 5-6, some economists anticipate a potential rate hike to 4.6%.

Minutes from the RBA’s June meeting revealed ongoing concerns about inflation returning to its target range of 2 to 3% quickly enough.

CreditorWatch comments, Anneke Thompson, Chief Economist: “Both the NAB Monthly Business survey and Westpac Consumer Sentiment Survey overall point to a continuing slowing economy, despite some mixed reads in the various data sets. On the consumer side, sentiment fell over the month by 1.1 per cent and continues to be well below the long run average. Interestingly, despite tax cuts beginning on July 1, the ‘family finances vs a year ago’ and ‘family finances over next 12 months’ series both fell, and quite significantly. This is because a majority (just under 60%) of consumers now expect an interest rate increase. On the business side, conditions continued to ease while confidence improved. These two results are difficult to reconcile, however may be explained by businesses reporting easing in labour costs, purchase and final product prices, but continued high capacity utilisation. While the indicators are subtle, these results broadly point to businesses still being busy, but demand starting to cool.

“Overall, the RBA will likely get a sense of relief at these results, as they need sentiment to remain weak and consumers to keep their wallets shut in order to nudge that sticky inflation number down. They will also be relieved that the labour force still appears strong, albeit with some heat coming out of it. While these are just two data sets in a broad array of data that is released monthly, neither points to an economy heating up again, and inflation being pushed higher, which would be a worst case scenario for the RBA.

“CreditorWatch’s BRI data for May 2024 provides real time data that backs these sentiment measures. Trade payment defaults are at record highs, and insolvency and business failure rates continue to move higher, especially in those industries that rely on discretionary spending.”

The Westpac survey also highlighted a decline in consumer expectations for family finances. The family finances sub-index dropped 8.4% in July, nearly erasing the previous month’s 9.7% gain.

In contrast, NAB’s business confidence survey, released the same day, showed an uptick in business confidence to its highest level since early 2023. This rise was driven by broad-based increases across all industries, though business conditions continued to edge down, following a trend since late 2022.

“Of note is the sharp decline in the employment index this month,” said NAB head of Australian economics Gareth Spence. “The employment index is now below its long-run average, possibly indicating that the broader economic slowdown is impacting labor demand more strongly.”

Other activity indicators were mixed. Forward orders remain negative, particularly in the retail and wholesale sectors. Labor cost growth eased to 1.8% quarterly (down from 2.3% in May), while purchase cost growth fell to 1.3% from 1.7%.

“Encouragingly, key price and cost growth measures reversed last month’s increase,” added Spence. “However, retail price growth remains high despite the weaker activity outlook and confidence in the industry.”

Commonwealth Bank of Australia head of Australian economics Gareth Aird noted that the surveys, along with new job advertisement data from Seek, depict an economy continuing to soften.

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Yajush Gupta

Yajush Gupta

Yajush is a journalist at Dynamic Business. He previously worked with Reuters as a business correspondent and holds a postgrad degree in print journalism.

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