Australian consumer morale at four-year low on rate, living cost pressures

The Westpac-Melbourne Institute survey, published on Tuesday, showed Australian consumer confidence dropping to its lowest level in four years during November, as rising expenses and another increase to interest rates drove households further into a pessimistic outlook.

The consumer sentiment index declined 2.7% to 78.2 from 80.4 in October, marking the weakest reading since late 2022. Westpac pointed out that, outside of that period, such low readings have only occurred during the economy's most severe downturns, such as the onset of COVID, the global financial crisis, and the recessions of the early 1990s and 1980s.

Cost-of-living pressures continue to be the primary factor. Over the past month, petrol prices have edged toward A$2.40 a litre, while official inflation stood at 4.3%. The Reserve Bank of Australia lifted the cash rate by another 25 basis points to 4.85%, an 18-year peak. Westpac noted that any boost from the US midterm results was overshadowed by concerns over inflation and interest rates. Sentiment among mortgage holders dropped to a record low based on data extending back to 1994.

The November decline was driven by a significant worsening in near-term economic expectations, which fell to their weakest point since August 2020. Households also turned negative on house prices for the first time since late 2022, and more than 70% of consumers anticipate mortgage rates will continue to rise in the next 12 months. Job-loss concerns are gradually increasing, though Westpac described consumers as cautious rather than panicked.

Combined with the earlier NAB survey, the reading bolsters the argument for the RBA to pause in December and reduces the likelihood of a sixth rate hike. This leaves the Australian dollar with little support from rate expectations, particularly as it remains exposed to fluctuations in AI-related equities. Front-end Australian bond yields are most responsive to any shift toward pricing in an earlier conclusion to the tightening cycle. Inflation above target and petrol prices near A$2.40 a litre prevent the RBA from shifting policy quickly. Cheaper oil would provide the fastest relief for households.

For the RBA, the survey adds to evidence that its five rate increases this year are having a strong impact on interest-sensitive parts of the economy. Westpac expects the central bank to hold steady at its December 7-8 meeting while it evaluates the effects of its tightening. It also does not foresee a hike in February, though it cautioned that high inflation will continue to test the bank's resolve.

The weak sentiment is a concern for retailers heading into the Christmas period. However, Westpac noted that gift-spending intentions have held up better than the headline mood suggests, with mortgage holders most likely to reduce their spending.