Australian consumer sentiment has strongly recovered in April due largely to the Reserve Bank of Australia deciding to pause the aggressive rate-hiking campaign it has waged since May last year.
The Westpac Melbourne Institute Consumer Sentiment Index surged by 9.4% in April from 78.4 in March to 85.8 in April.
“Confidence is now at its highest level since June 2022, although still 10.4% below April 2022, the month before the RBA board began raising the cash rate,” said Bill Evans (pictured above), Westpac chief economist. “Despite this lift in April, we still characterise consumer sentiment as weak and consistent with Westpac’s view that consumer spending through 2023 and at least the first half of 2024 will be lacklustre.”
The survey was conducted from April 3-6, which covered the RBA’s policy meeting on April 4.
Australians remained cautious following the board’s decision, with 34.11% still expecting the standard variable rate to lift by more than 1% over the next year. And while that figure was certainly an improvement from 44.55% in March and 59.64% in November, it still points to considerable apprehension around interest rates on the part of consumers.
Evans said the improved outlook for interest rates has provided a significant boost to confidence in the housing market.
“The index ‘Time to Buy a Dwelling’ increased by 8.2% from 65.7 to 71.1,” he said. “This measure of confidence in housing, which we believe is heavily influenced by affordability, remains very weak. The April result only restores the Index to the 70–80 range where it has held since the tightening cycle began. And recall that this Index is still 46% below its peak back in November 2020.
“Confidence in the outlook for house prices has boomed. The national Index of House Price Expectations lifted by 16.7% to 130.31, only 2.8% below its level in April last year, just before the tightening cycle began. The index has increased by a remarkable 43% since its recent low in November last year.”
Westpac said that with underlying inflation still likely to be in the 6.5%–7% range, when the March quarter inflation quarter prints on April 26, and the unemployment rate holding around 50-year lows, it expects the case for extending the pause in the May 2 meeting to be challenged.
“Risks at this stage to the inflation outlook from a potential wealth effect through the housing recovery, which is being signalled in this survey; the boost to demand from the unexpected sharp lift in immigration and Australia’s current dismal productivity record put more uncertainty around the board’s current two-year plan to return inflation to the 2–3% target band,” Evans said.
“The board’s decision will be to weigh the ‘here and now’ evidence against its two- year forecast. Westpac expects that a final 0.25% increase in the cash rate at the May board meeting remains the best policy approach rather than awaiting even more information and risking even higher rates later in the cycle.”
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