Consumer confidence has plunged below the levels seen during the global financial crisis, causing a record number of households to slash their Christmas spending plans.
The widely watched Westpac-Melbourne Institute Consumer Sentiment Index dropped 6.9 per cent in November, and is now only just above COVID-19 pandemic lows.
"This point of 78.0 is now below the low point of the GFC (79.0) and only slightly higher than when the COVID pandemic first hit in April 2020 (75.6)," said Westpac's chief economist Bill Evans.
"Prior to that, we need to go back to the deep recession in the early 1990s to find a weaker read."
An index reading below 100 means pessimists outnumber optimists, with current readings showing that the overwhelming majority of households are feeling negative about their finances.
Every year in the run up to Christmas, the survey asks people how much they plan to spend on presents compared to the previous year.
Unsurprisingly, given the deep pessimism most Australians are feeling, the response this year was often less.
"Christmas spending plans are very subdued this year," Mr Evans observed.
"Nearly 40 per cent of consumers expect to spend less on gifts this year — the highest proportion planning cutbacks since we started asking the question in 2009, the average being 33 per cent."
However, separate figures from the Australian Bureau of Statistics show most people are yet to cut back their spending more broadly.
Spending jumped massively in September, compared to that month a year earlier, when the bulk of Australia's population was locked down in New South Wales, Victoria and the Australian Capital Territory.
However, even compared to pre-pandemic September 2019, total household spending was 19.8 per cent higher when adjusted for current prices and the timing of holidays.
The ABS said the largest increases, compared to 2019, were in clothing and footwear (up 35.1 per cent), recreation and culture (up 31.4 per cent), furnishings and household equipment (up 24.7 per cent) and food (up 17.6 per cent).
Rate rises and budget dent confidence
The disconnect between current spending and consumer confidence appears deeply linked to interest rate rises.
While the news of each rate increase immediately weighs on sentiment, it generally takes at least two to three months for the increase in repayments to hit the bank accounts of borrowers.
Even though the Reserve Bank of Australia (RBA) has slowed the pace of interest rate rises over the past two months, Mr Evans said the 0.25-percentage-point increases, and messaging from the RBA after its latest decision, have continued to have a deeply negative effect on confidence.
"Sentiment amongst those surveyed before the decision showed a steady 83.1 but sentiment amongst those surveyed [afterwards] showed a steep fall, to 75.6," he noted.
"Given that the move was widely anticipated, the negative response likely reflects the clear signal from the governor that further increases can be expected.
"Certainly, more consumers expect substantial follow-on rate rises. Amongst those surveyed after the RBA decision, nearly 60 per cent expect rates to increase by 1 percentage point or more over the next year, up on 54 per cent in the October survey."
CBA senior economist Belinda Allen said mortgage borrowers were the most pessimistic households, with tenants not far behind as rents surge.
"Mortgage holders have the weakest level of sentiment at 68.4, which is actually a record low for the series (back to 1996). It fell by 15.7 per cent in November," she wrote.
"Renter sentiment also fell, down by 9.8 per cent with rents rising quickly at the moment."
While the government framed its first budget as an effort not to worsen inflation and interest rate pressures, it seems most voters would have preferred some extra cash heading in their direction.
Mr Evans said that more than a third of people thought the budget had made them worse off.
"The proportion responding that the October budget has worsened their financial outlook was a historically high 35 per cent," he observed.
"While that is well short of the 58 per cent recorded after the newly elected Coalition government's 'horror' budget of 2014, it is the second-highest since then and well above the 14-year average of 30 per cent."
Business confidence falls to 0
Mirroring the division between household spending and confidence, business conditions remained well above average levels at 22 points but confidence fell to zero.
"As we have seen in official data, consumers continue to spend despite headwinds from inflation and interest rates, and that run of strength looks to have carried on into October," noted NAB's chief economist Alan Oster.
"Conditions remain fairly robust across the states and across sectors."
Confidence, however, fell 4 points to 0, which is below the long-run average and means there are as many pessimistic businesses as optimistic ones.
Moreover, the fall in confidence was widespread across industries as diverse as transport and utilities, mining, manufacturing, finance, business and property services, recreation and personal services, and wholesale.
Business confidence fell most sharply in Victoria, but it also declined in New South Wales, Queensland and South Australia.
"Despite the strength in conditions, confidence has been falling for several months as headwinds have weighed on the outlook for the global economy and Australia," Mr Oster added.
"We do share these concerns with consumption expected to soften materially in 2023 as inflation and higher interest rates take a toll.
"Still, a strong labour market will be an ongoing source of support for households and for now we don't foresee a recession for Australia."
In a separate report on Tuesday, AMP Capital's chief economist Shane Oliver reiterated that an Australian recession in 2023 is also not his base case, however he does see a 40 per cent chance that Australia's economy could go backwards next year.
