Confidence weak despite rate cuts

WARY consumers are unmoved by recent interest rate cuts and healthy economic figures, according to an index of consumer sentiment that registered a rise of just 0.3% in June to 95.6%.

The survey of 1200 people by Westpac and the Melbourne Institute produced "another disappointing result", said Westpac's chief economist Bill Evans. "It follows a second consecutive cut in the official cash rate by the Reserve Bank."

Sentiment has risen only 1.1% from its April level and remains 1.7% below the level recorded in October last year, despite a reduction in the cash rate of 125 basis points. The action by the Reserve Bank has brought the average standard variable mortgage rate down by nearly 1%.

"Clearly other factors are dominating rates in the minds of consumers - those factors are concerns about the domestic economy and international conditions," Mr Evans said.

Across the five sub-indexes of consumer sentiment, two improved and three deteriorated. Lower interest rates contributed to a strong rise in the family finances index: up 4.6% compared to a year ago, following a 17% gain in May. Willingness to spend on a major household item was also up 7.5%, and positive responses to questions about whether it was time to buy property or a car rose 8.2% and 7.5% respectively. However, consumers' views about the prospects for their family finances slumped by 7.7%, and their assessment of the economic outlook over the next five years fell by 3.8%.

Phil Lewis, a Professor of Economics at University of Canberra, said the figures described "a revolution" in consumer behaviour in Australia. "Before the global financial crisis, people were running up huge credit bills. And what's happened since the financial crisis is that people have seen their wealth decline - share prices have gone down, house prices have failed to rise, they're saving a lot more.

"Essentially, consumer behaviour is returning to normal. What we're seeing is not a fall in retail sales, despite what people like Gerry Harvey are telling us. It's just levelled off.

"In economics we say interest rates are very effective when you put them up and less effective when you bring them down. This is largely because the Reserve Bank tends to put them up when people are borrowing large amounts of money. The level of debt is high, so increases in interest rates have a big effect on the amount of interest people have to pay. When they're becoming net savers, a fall in the rate of interest has only a marginal effect on their wealth."

Michael Thorpe, the head of the Department of Economics at Curtin University, said the results of the survey were unsurprising given "so many households are trying to repair their balance sheets at the moment. Paying off debt seems to be a priority for people. There's still a lot of uncertainty about what's happening in Europe and the slowdown in China.

"I think people are quietly cynical about the headlines about interest rates. The extent of the cuts are not feeding through to people, and what does come through - they're taking advantage of that to save. So their longer term and medium term outlook is still pretty uncertain."

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