Australia: Consumer sentiment falls on ‘Brexit’ and election concerns – Westpac

Bill Evans, Chief Economist at Westpac, notes that the Westpac Melbourne Institute Index of Consumer Sentiment fell by 3% in July from 102.2 in June to 99.1 in July.

Key Quotes

“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 despite having to negotiate two major shocks in ‘Brexit’ and election uncertainty.

With the AUD lifting above USD0.76 and the inflation target at risk it seems a sensible policy option to cut rates further.

However we are mindful that despite cutting rates the Board did not lower its growth forecasts indicating that the motivation behind the May decision was entirely around the need to credibly achieve the inflation target over the forecast period. Rigid adherence to that policy in future might be questioned particularly, as hinted at in this survey, if the rate cuts spill over into excessive exuberance in asset markets. Hence we expect that this cut will, most likely, be the last in the current easing cycle.”