Crisis of confidence: terrified consumers are closing their wallets and fearing for the future

The ANZ Roy Morgan survey took place in the period following the RBA’s 50 basis point rate hike earlier this week and was similar in its findings to the sentiment survey released by Westpac on Wednesday.

The magnitude of the rate hike certainly came as a shock to most economists – the group was eyeing a 25 basis point hike, as was the public.

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The larger-than-expected rate hike has been the RBA’s tonic for a bigger and faster rise in inflation, a feature that is also hugely influencing consumer sentiment.

These come into play in another major factor that determines whether the consumer sleeps well at night: property prices. Whether people are active buyers or sellers, the value of their home has a big influence on their sense of wealth and financial well-being.

Recent house price readings suggest that values ​​have already peaked and in most capitals are already falling. Estimates of their fall by the end of this year and into 2023 vary – but the consensus is around 15-20%.

And then there is the fall in equities that we have seen throughout the year, which over the past week has turned into a rout. Wednesday the market hit a low for the year.

This upsets retirement pension balances, which, for those approaching retirement, threatens to become a significant problem. For those in the early stages of their careers, declining pension balances always fuel the wealth effect.

Whether people are active buyers or sellers, the value of their home has a big influence on their sense of wealth and financial well-being.

Geopolitical and economic turmoil abroad tops off the fear factor. The energy crisis triggered by the end of the COVID-peak and the Russian war against Ukraine have deeply destabilized consumers.

Confidence is an important economic measure as it informs consumers’ willingness to spend and household consumption is Australia’s main economic driver.

Confidence surveys typically measure our willingness to buy a major household item and it’s a good indicator of what might otherwise be seen as an index of consumer risk.

Big retailers such as Wesfarmers-owned Bunnings could feel the pain of a spending slowdown.

If we are uncertain about the future of finances, we are less likely to risk spending on a big item (like a big white product or a TV) – choosing to save money instead.

The ‘time to buy a major household item’ measure has fallen more than 14% in a week and, according to the Westpac Melbourne Institute consumer sentiment survey, the ‘time to buy’ index of a dwelling” has now reached a post-GFC low.

Consumer sentiment then trickles down to their willingness to buy optional items and this explains why stock analysts have begun to downgrade the earning potential of discretionary retailers including Wesfarmers (owner of Bunnings, Kmart, Target and Officeworks), JB HiFi, Kogan and Harvey Norman.

In a note, Macquarie analysts said: “The challenge for corporate profitability will be keeping wage growth at a rate high enough to avoid demand destruction without eroding profitability.”

Since these comments were made by Macquarie earlier this week, the Fair Work Commission decided to raise minimum wages by 5.2 percent – ​​a move that will put pressure on companies that are currently or soon to be faced with company bargaining agreements not covered by the Fair Work decision.

If there’s one bright spot to take from its plummeting consumer confidence index, it’s that the Reserve Bank’s moves to dampen inflation by raising rates are already starting to gain traction.

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