The slump in consumer confidence in recent months is likely to take its toll on spending and economic growth later in the year, Westpac chief economist Bill Evans warns.
The latest Westpac-Melbourne Institute leading index – which indicates the likely pace of economic activity three to to nine months into the future – fell to 0.58 per cent in May from 1.09 per cent in April.
While a result above zero indicates that economic growth is expected to hold above its long term trend – seen about 2.8 per cent annually – Mr Evans said there was an important theme emerging around the outlook.
He said there had been a significant shock to consumer confidence and a major contributor to the slowdown in May.
“The slump in consumer sentiment – under the weight of rising interest rates and falling house prices – is likely to take its toll on spending later in the year and into 2023,” Mr Evans said.
“We expect this to see the growth rate in the economy fall below trend and should be foreshadowed by negative reads for the leading index growth rate later this year.”
However, in the interim, like the leading index suggests, the economy’s positive momentum will carry through the June and September quarters as consumer spending continues to benefit from the post-COVID reopening and support from high household savings.
The drop in confidence and a fall in Australian share markets partially offset the positive components in the leading index, such as rising commodity prices and dwelling approvals.
The risk of a recession in the United States and a spillover into other parts of the world has dominated fears in global financial markets in recent weeks.
But neither the Reserve Bank nor the Labor government see that occurring in Australia at this stage, even though the central bank has warned households it will do what its takes to get inflation under control.
Addressing an event in Sydney on Tuesday, RBA governor Philip Lowe said a recession was not on his horizon, pointing to low unemployment, strong household budgets and the highest terms of trade ever.
“But if the last two years has taught us anything, you can’t rule anything out,” he told the American Chamber of Commerce in Australia.
Treasurer Jim Chalmers also said a recession is not on the government’s radar, but conceded there is a need to navigate difficult circumstances at the moment.
Business too is hopeful that a downturn can be avoided so soon after the 2020 COVID-19 pandemic.
“I think there’s some distance from that,” Australian Chamber of Commerce and Industry chief executive Andrew McKellar told reporters in Canberra.
“(But) we’re living in an economy where supply constraints are very real and where inflationary pressures are growing.”
The RBA board has raised the cash rate at its past two monthly meetings by a total of 75 basis points, the latter being a 50 basis point increase and the largest rise since February 2000.
Economists predict another 50 basis point rise in July, which would take the cash rate to 1.35 per cent, with the central bank now predicting inflation rising to seven per cent by the end of year rather than six per cent.
The minutes of the June board meeting, also released on Tuesday, show the options of a 25 or 50 basis point increase were discussed, with the latter chosen in the face of a bigger rise in inflation than earlier predicted.
“I would expect we will have the same discussion again at the next meeting (in July),” Dr Lowe said.
