Australia Consumer Sentiment Falls to Lowest Since ’11 on Budget

Australian consumer confidence fell to its lowest level since August 2011, prior to the central bank’s most recent easing cycle, after the government’s budget flagged spending cuts and a new tax on high-income earners.

The index of consumer sentiment plunged 6.8 percent to 92.9 in May from a month earlier, Westpac Banking Corp. and Melbourne Institute said today. The survey of 1,200 adults was conducted in the week of May 12-17. Treasurer Joe Hockey handed down the Liberal-National coalition government’s first budget on May 13.

“The sharp fall in the index is clearly indicating an unfavorable response to the recent federal budget,” Westpac Chief Economist Bill Evans said in a statement. “Respondents were particularly concerned about the impact of the budget on their own finances.”

The government said last week it will cut spending on welfare and the public service and impose a tax on the highest paid as it sets a path to a budget surplus. In the days that followed, opinion polls showed a high proportion of voters said they believed the changes would hurt their finances, and support for the government dropped.

The sub-index tracking assessments of ‘family finances compared to a year ago’ fell by 11 percent to its lowest level since July 2013. The sub-index tracking expectations for ‘family finances over the next 12 months’ slumped 23 percent to its lowest reading on record.

Economic Boost

Today’s report did contain some positives for the government.

“Respondents seem to be signaling that the budget will assist the economy over the medium term,” Evans said. The sub-index tracking expectations for ‘economic conditions over the next five years’ was boosted by 11 percent, while the sub-index tracking assessments of ‘whether now is a good time to buy a major household item’ rose by 3.2 percent.

The Reserve Bank of Australia cut rates by 2.25 percentage points since late 2011 to a record-low 2.5 percent, and said in minutes of its May meeting released yesterday that borrowing costs were likely to remain on hold “for some time yet.”

“The big issue for the bank and the economy will be whether this strong reaction from consumers indicates that the recent improving trend in consumer spending is interrupted,” Evans said. “While households have clearly reacted to some very unnerving headlines, the Budget has clearly been structured to minimize its impact on the fragile recovery.”

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