Consumer sentiment in Australia has plummeted to its lowest level in over two years, dragged down by European debt concerns and worries about the introduction of the price on carbon.

The Westpac-Melbourne Institute Index of Consumer Sentiment fell to a reading of 92.8 points in July in seasonally adjusted terms from 101.2 points in June.

Westpac chief economist Bill Evans said this was a surprisingly weak result.

Mr Evans said, “The only other time in recent history when the Index has been sustained around the current level was during the period following the GST introduction which also coincided with the bursting of the ‘dot com’ bubble.”

“Not only is the level of the Index disturbingly low but the sheer magnitude of the fall is also remarkable. We have seen 11 falls of this magnitude since the early 1990s recession but only two of them have been from a lower starting point (once again these occurred during that 2008 – 2009 period).

“Furthermore, such large falls have typically been associated with a major event such as an interest rate increase; a spike in petrol prices; the collapse of Lehmans; or recession fears.”


Carbon tax worries consumers

A combination of concerns over the European financial crisis; the ongoing impact of the seven interest rate hikes between October 2009 and November 2010; and uncertainty about the introduction of a price on carbon are undermining the confidence of consumers, according to Westpac’s survey. This is despite a very low unemployment rate of 4.9 per cent.

Mr Evans said “It must be stressed that this survey closed the day before the government’s announcement on the details of the decision to price carbon and provide an associated compensation package.

By far the largest fall in confidence (down by 11.1 per cent), was in the highest income group. The government’s compensation package associated with the introduction of a price on carbon is least generous for those in the upper income brackets.

The confidence of those folks who have a mortgage plummeted by 16.5 per cent. Despite the Reserve Bank keeping rates on hold following the Board meeting in July , the Bank has persisted with its strongly hawkish rhetoric.

“This is continuing to undermine confidence amongst households who it would appear are incredulous that such a policy is favoured given the current circumstances,” said Mr Evans.