Ballooning inflation, rising interest rates and a loss of confidence around the economic outlook, in Australia and abroad, has sent consumer sentiment reeling.
The Westpac-Melbourne Institute survey for June showed the consumer sentiment index fell 4.5 per cent to 86.4, and follows last week’s decision by the Reserve Bank of Australia to lift the cash rate by a large 50 basis points.
Westpac chief economist Bill Evans said in the 46-year history of the survey the index has only been lower five times – this included the COVID-19 pandemic, the global financial crisis and the recessions of the 1980s and 1990s.
The survey’s weekly counterpart compiled by the ANZ and Roy Morgan also tumbled 7.6 per cent to 80.4 points, its lowest level since early April 2020.
ANZ head of Australian economics David Plank said the percentage of respondents who expect “good times” for the economy over the next five years dropped to 10 per cent – the lowest level on record.
The downcast mood comes after Reserve Bank of Australia governor Philip Lowe warned inflation could reach seven per cent by the end of this year, requiring further interest rates hikes to bring it under control.
In his first appearance since last week’s board meeting, when the cash rate was jacked up to 0.85 per cent, Dr Lowe said decisive action was needed in the face of rising inflation.
“We’ll do what’s necessary to get inflation back to two to three per cent,” Dr Lowe said in a rare television interview on ABC’s 7.30 program on Tuesday.
“I’m confident we can do that but it’s going to take time.”
He said it was not unreasonable to expect the cash rate to reach 2.5 per cent.
Mr Evans said high inflation has become the major challenge for the Australian economy.
“The RBA needs to normalise policy quickly to begin to address this very disturbing challenge,” Mr Evans said.
“Another 50 basis points in July will be a further decisive step in this process.”
Dr Lowe’s comments came with global share markets in turmoil fearing the US economy could fall into recession if the Federal Reserve raises interest rates aggressively to combat its own inflation problem.
US inflation is at 8.6 per cent, its highest level in 40 years.
But Dr Lowe is confident the Australian economy will continue to grow pretty strongly over the next six to 12 months.
“There is still a bounce back from all the COVID-19 restrictions, people are spending in a way they weren’t able to do last year,” he said.
Dr Lowe said there was a big backlog of construction work to be undertaken and the number of job vacancies is extraordinarily high.
“So people can be confident the jobs will be there, and in that environment people will keep spending,” he said.
Prime Minister Anthony Albanese also does not believe Australia is heading toward a recession.
“Australia has a difficult time because there are difficult global circumstances,” Mr Albanese told ABC Radio. “But we will work our way through it.
“I’m positive about Australia’s future and I’m very positive that we can continue to create jobs and to have an economy that creates a better future.”
Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)