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Australian Consumer Confidence Slumps by Most in 17 Months

Australian consumer confidence slumped by the most in 17 months as a government announcement the budget would remain in deficit overshadowed record low interest rates, a private survey showed.

The sentiment index for May dropped 7 percent to 97.6, a Westpac Banking Corp. and Melbourne Institute survey taken May 13-18 of 1,200 adults showed today in Sydney. That was the biggest drop since December 2011 and the first time since October 2012 the figure has fallen below 100, which indicates pessimists outnumber optimists.

Reserve Bank of Australia Governor Glenn Stevens and his board slashed borrowing costs by 2 percentage points over the past 19 months to 2.75 percent, joining global counterparts in embracing record-low rates in an economy where inflation is contained, mining spending is predicted to crest, and credit growth stays subdued. The government in December abandoned a pledge to return the budget to surplus this fiscal year and last week projected a deficit of A$19.4 billion ($19 billion).

“This weakness in confidence is being driven by a sharply negative response to the budget,” said Bill Evans, Westpac’s chief economist. “We expect that the dissatisfaction is not only due to concerns around some of the savings measures in the budget but also the sharp deterioration in the fiscal position, indicating renewed fears about the overall state of the economy. These concerns are also likely to have been fueled by the surprise fall in the Australian dollar before and during the survey period.”

Currency Falls

The Australian dollar declined after the report, trading at 97.89 U.S. cents at 11:32 a.m. from 98.21 before the release. Traders are pricing in a 22 percent chance the RBA will cut rates to a fresh record of 2.5 percent at its June 4 meeting, according to interest-rate swaps data compiled by Bloomberg.

Evans, who predicts the benchmark rate will be cut to 2 percent in this cycle, said a reduction next month will depend on the outlook for business investment and credit growth.

All components of the index fell: the sub-index tracking views on family finances compared with a year ago dropped 8 percent; and family finances over the next 12 months declined 7 percent. The economic outlook also deteriorated, down by 13.4 percent over the next 12 months and 6.9 percent over the next five years. Whether now is a good time to buy a major household item was down 1.3 percent, it showed.

Consumers Gloomy

“This is not a heyday for discretionary retail,” Myer Holdings Ltd. Chief Executive Officer Bernie Brookes said on a media call today after releasing third-quarter sales. “The reality is there has been a turndown in consumer sentiment.”

A government report today showed internet skilled vacancies fell 1.3 percent in April after declining a revised 1.5 percent in March. It has dropped every month since December 2011.

In the May 14 budget, Treasury projected unemployment would rise to 5.75 percent by June 2014, from 5.5 percent last month, as the economy undergoes a “substantial transition” from resource investment to growth led by industries like housing construction.

“The survey result strengthens the case for another rate cut as early as June,” Evans said. “However, the outlook for business investment and the path of the Australian dollar will be important factors in that decision.”

Australia’s currency dropped 4.7 percent in the past month, the worst performer among the 16 major currencies tracked by Bloomberg. The local dollar, which didn’t rise above 85 U.S. cents between 1990 and 2006, hasn’t dropped below that level in almost three years.

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