It would be an understatement to say that this week’s consumer sentiment releases by the Westpac-Melbourne Institute and ANZ-Roy Morgan Research (RMR) were disappointing., with both measures showing minimal bounce after the heavy falls following last month’s “tough” Federal Budget (see next chart).
Both indexes have fallen some 16% since last year’s Federal Election and are down around 10% over the year – a worrying omen for a central bank and government that is hoping for interest rate sensitive sectors of the economy to pick-up the baton as the mining investment boom unwinds.
The question now is: how worried should authorities be about the slump in consumer sentiment, and does it seriously threaten efforts to rebalance the economy?
To help illuminate the issue, I have created a series of charts tracking both measures of consumer sentiment/confidence against various economic indicators.
First up, I have plotted consumer sentiment against house prices:
As you can see, confidence is typically a strong leading indicator of house price growth, suggesting potential dangers ahead.
Second up, we have sentiment against housing finance:
Again, correlations are strong, portending potential danger ahead.
Third, we have sentiment plotted against dwelling approvals:
Different book, similar story.
Finally, I have plotted consumer sentiment against retail sales:
More of the same.
Clearly, there are reasons to be concerned about the recent sharp falls in consumer sentiment/confidence, and their failure to bounce back as expected once the initial “sticker shock” of the Budget wore off. For if sentiment does fail to recover in the months ahead, then the housing market and consumer spending could very well take a big hit, stifling rebalancing towards the non-mining economy.
The next few month’s readings are shaping up to be crucial.
