A division of Westpac Banking Corporation ABN 33 007 457 141

Media release
14 March 2012

Strict Embargo 10:30am

Consumer sentiment tumbles

The WestpacMelbourne Institute Index of Consumer Sentiment fell by 5.0% in March from 101.1 in February to 96.1 in March.

Westpac's Chief Economist, Bill Evans commented, The Index has now fallen below the level in October last year prior to the Reserve Bank's two rate cuts in November and December. With the Index below the 100 level pessimists clearly outnumber optimists.

Sensitivity to interest rates has clearly been one factor responsible for this weak print. The survey in February closed off before it was announced that banks were raising their mortgage rates despite the Reserve Bank having kept the official cash rate on hold. Recall that the survey in February covered the week of the Reserve Bank's Board meeting. At the beginning of the week media reports had led respondents to confidently expect a 0.25% rate cut from the Reserve Bank.

With the two previous rate cuts in November and December being passed on in full by the banks it is reasonable to assume that many borrowers expected a further cut in the mortgage rate of 0.25%. Instead, mortgage rates were actually increased in the following week with banks raising mortgage rates by an average of 0.10%. It is likely that this reversal has impacted confidence.

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This rate effect is consistent with the 6.8% fall in the confidence of those folks who have a mortgage. However this observation does not explain why there was a 10.8% fall in the confidence of respondents who are renting accommodation. There are other forces at work. Petrol prices for example, rose 3% between the February and March survey to average around $1.45 a litre.

However, our supplementary questions indicate that respondents are particularly concerned about economic conditions and employment.

In the March survey we also measure news categories that are most recalled by respondents and whether these categories are assessed to be favourable or unfavourable.

In March the most recalled news categories were "economic conditions" (56.4% of respondents); international conditions (30.9%); Budget and Taxation (28%); interest rates (24.5%) and employment (16.6%) These proportions are near historical highs for "economic conditions " and "employment". The measures of "favourability" for both "economic conditions" and "employment" were near the lows registered in the 2008/09 and 2001/02 periods.

Relative to December, respondents were marginally more positive about international conditions but much more concerned about employment and interest rates while the concerns about economic conditions which increased sharply in December remained very high in March.

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Recent data releases showing weak growth in GDP in the December quarter and a rise in the unemployment rate for February are likely to have exacerbated respondents' concerns as would the sharp fall in company profits reported for the final quarter of 2011.

All five components of the Index fell in March. There was notable weakness in how respondents view their finances: the sub-indexes tracking responses on family finances compared to a year ago fell by 8.6%; and family finances over the next 12 months fell 4.5%. The economic outlook also deteriorated, the sub-indexes tracking views on economic conditions over the next 12 months fell by 2.5% and economic conditions over the next 5 years fell by 6.1%. The sub-index tracking views on whether now is a good time to buy a major household item fell by 3.8%.

We have found that how respondents assess their own finances is particularly significant for spending plans. This Index which is made up of the first two sub indexes discussed above fell by 6.3% the sharpest fall since June 2010.

Saving plans continue to be very conservative with 34.6% of respondents assessing bank deposits as the wisest place for savings. That is up from 30.1% in December although below the record 37.8% proportion in September 2011. The attraction of shares continues to deteriorate. Only 5.4% of respondents nominate shares as the wisest place the lowest proportion since the early 1990's.

The Reserve Bank Board next meets on April 3. Since the last Board meeting we have seen a steady stream of disappointing data releases for Australia. Weak GDP growth; rising unemployment; and continuing softness in the housing market dominate. As discussed above, these factors are impacting consumer confidence with today's result

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A division of Westpac Banking Corporation ABN 33 007 457 141

being particularly disappointing. Evidence of a slowdown in China has become more widespread although financial conditions in Europe and the US are improving.

We assess that the case has already been made for lower rates in Australia but expect that, at this stage, the Board is not convinced. More time will be required before we see another rate cut. Our best expectation is in May or June, Mr Evans said.

Issued by: Westpac Banking Corporation Further information:

Bill Evans Chief Economist Westpac Banking Corporation Ph: (61-2) 8254 8531 Guay Lim Melbourne Institute Ph: (61-3) 8344 2146 Michael Chua Melbourne Institute Ph: (61-3) 8344 2144

Survey interviews are conducted by OZINFO Research on the telephone using trained interviewers. Telephone numbers and the household respondent are selected at random. This latest survey is based on 1200 adults aged 18 years and over, across Australia. It was conducted in the week from 5 March to 9 March 2012. The data have been weighted to reflect Australia's population distribution. Copyright at all times remains with the Melbourne Institute of Applied Economic and Social Research.

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