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Australian consumers turn gloomy despite rate cuts: realistic fears about Eurozone crisis

Consumer sentiment collapsed in December by the most since the start of the  global financial crisis three years ago even as the Reserve Bank cut rates to  boost confidence in the economy.

The Westpac-Melbourne Institute index of consumer sentiment fell 8.3 per cent  in December, after a 6.3 per cent rise in November. That drop is the most in a  single month since October 2008 – when US investment bank Lehman Brothers  collapsed. The index stands at 94.7 in December, down from 103.4 in  November.

The dollar slipped slightly on the news and was recently trading just below  parity at 99.98 US cents, after falling in overnight trade. Shares extended  their declines, with the benchmark S&P/ASX200 index recently down 0.4 per  cent.

Westpac’s chief economist Bill Evans said the index was now at the  lowest  level since August when consumers were concerned that the Reserve  Bank was  about to lift rates.

“On face value it should be a surprise that the index had not risen   following a second rate cut from the Reserve Bank,” said Mr Evans.  “However,  the history of previous easing cycles shows that rate cuts do not guarantee an  improvement in sentiment.

“Specific news which is likely to have unnerved respondents is the  reported  increase in the unemployment rate from 5.2 per cent to 5.3 per  cent with a loss  of 40,000 full time jobs,” he said.

“Of course, the constant stream of news on developments in Europe is  also  likely to have impacted respondents, while equity markets were  volatile,” he  said.

The Reserve Bank cut interest rates in November and December, after inflation  proved weaker than initially feared but concerns about the European sovereign  debt crisis escalated.

That crisis threatens an interruption to credit into Australia’s banks, a hit  to consumer confidence, and a slowdown in global economy, particularly in  China.

National Australia Bank economist Alexandra Knight said the drop in consumer  mood was a surprise given the December rate cut.

“Possibly consumers are thinking about what was behind the rate cut,” she  said. “There is a lot of weakness in Europe still and a lot of uncertainty in  financial markets.

“Also the softening of the labour market is creating concerns about income  growth,” Ms Knight said.

The consumer response to the survey suggests that rate cuts from the RBA may  not be as effective in stoking demand as they had been in previous rate  reduction cycles.

“We can’t really manage for an external factor that the domestic economy  doesn’t have so much influence over,” she said.

Although worries about the global economy have increased in recent months,  conditions in Australia have remained relatively strong.

Australia’s economy increased by 1 per cent in the September quarter, after  an upwardly revised 1.4 per cent rise in the June quarter, helped both by mining  investment and strong household consumption.

Job vacancies fall again

In another worrying sign for the local economy, the Department of Education,  Employment and Workplace Relations internet job vacancy index fell on a trend  basis in November, marking the eighth consecutive monthly decline in the  forward-looking series.

The result hints that employment growth “will continue to be subdued in the  near-term”, according to DEEWR.

The index fell 1 per cent to a reading of 85, to be 7.1 per cent lower over  the year, or 42.1 per cent below its March 2008 peak

Source:  The Age

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