The Economy: Consumer Confidence Also Softening

Consumer sentiment is at its lowest level in two years, as cautious households worry about interest rates, taxes and the economy.

The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 2.6 in June to 101.2, from 103.9 in May.

The weakness in consumer sentiment mirrors the easing in business confidence and conditions in the National Australia Bank monthly survey on Tuesday.

It is a complication for the Reserve Bank's interest rate thinking, especially with consumers very cautious about the outlook. No sign of a boom anywhere in this survey

This was the lowest level for sentiment since June 2009, according to comments from Bill Evans, chief economist at Westpac, in yesterday's statement.

''At that time (in June 2009), households were relieved that Australia appeared to have escaped the recessions which had affected most of the developed world, but were still fearful of the near term outlook,'' he said.

By comparison, the June 2011 survey found consumers were more confident about the near term outlook for the economy, but were concerned about their own financial position, and far more cautious about investment in shares.

In fact they survey revealed consumers continue to prefer investing in bank deposits rather than equities.

The measure of how respondents feel about their financial position compared to a year ago was 82.4 in June 2009, compared to 75.9 in June 2011.

The outlook for finances over the next 12 months was 113.8 in June 2009, compared to 95.5 in June 2011.

"The explanation for why the index continues to print such soft results must lie in those factors which are so depressing respondents' assessments of their own financial position,'' Mr Evans said.

"Interest rates remained on hold for a seventh successive month and the Reserve Bank toned down its strongly hawkish language.

"However, the commentary from the media and our own research indicates that households still expect rates to be rising over the next 12 months.

"The three items respondents nominated as the most recalled were economic conditions, interest rates and tax. While economic conditions and interest rates are usually the most recalled items it is unusual for tax to register such interest.

"There have really only been three periods over the last 10 years when tax has been a significant issue for respondents - during the period of the GST introduction; last year's focus on the mining tax and the current period. The degree of negativity from respondents about taxation issues is large and broadly similar in the three periods.

"It appears that despite steady interest rates and falling petrol prices concerns about the introduction of a price on carbon are rattling households.

"The concerns are also having a disproportionate effect on low income earners.

The confidence of wage earners below $40,000 per year is down by 7-8% whereas in the upper income groups confidence measures are, on average, reasonably steady.

"Four of the five components of the Index fell in June."Family finances compared to a year ago" fell by 2%; "Family finances over the next 12 months " increased by 1.1%; "economic conditions over the next 12 months " fell by 6.2%; "economic conditions over the next 5 years" fell by 3.7% ; while "whether now is a good time to buy more household items" fell by 2.1%.

"The attitudes of respondents to the wisest place for savings are consistent with the concerns about their finances which are apparent in the main survey. Consumer caution dominates savings decisions in this survey," he said.

And in something of a surprise there was a big rise in Australian dwelling commencements in the March quarter, according to figures from the Australian Bureau of Statistics.

It was the first rise in three quarters, and went against forecasts for a small fall of around 0.8%.

Housing starts rose 3.1% to 39,578 units, up from an upwardly revised 4% drop in the December quarter (5.7% originally), seasonally adjusted.

The March quarter result was up from an upwardly revised 38,405 (37,897 originally) units in the December quarter.

But in the year to March 2011, total dwelling commencements fell 12.9%, seasonally adjusted, which gives a better view of the continuing weakness in housing.

Private sector houses fell 1.9% for the quarter to 23,124, to be 18.2% lower than a year earlier, while other residential building starts rose 14.7% in the quarter and were 36% higher on the year.