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Consumer confidence lowest in 16 years -

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EMMA ALBERICI: The Australian sharemarket is enjoying a much needed bounce today but the same can't
be said for consumer confidence which has plunged to its lowest level in 16 years.

The Westpac-Melbourne Institute index of consumer sentiment dropped by 6.7 per cent in July.

Economists are surprised by the sharp fall given that interest rates have been on hold for four
months. But retailers say that consumer spending dried up in May and not even last week's tax cuts
have done anything to lift the mood.

Neal Woolrich reports.

NEAL WOOLRICH: Around the nation retailers have been bringing forward their mid-year sales. But it
seems nothing can coax Australian shoppers out of their current malaise. The latest evidence is the
Westpac-Melbourne Institute index of consumer sentiment which fell by nearly seven per cent in July
to its lowest level since January 1992.

BILL EVANS: That came as a big surprise given that interest rates had been stable over the month
and given that we're already at a 18-year low and given that it had fallen by a surprisingly large
5.6 per cent last month.

NEAL WOOLRICH: Bill Evans is Westpac's chief economist and says that consumer sentiment was 2.7 per
cent higher than today's level back in 1991.

BILL EVANS: And of course by then the unemployment rate was heading to 11 per cent. It's only seven
per cent above the low point in confidence that we saw in 1990. So we're really starting to look at
levels of the index that we really haven't seen since that last brutal recession.

And my feeling is that there's the economic environment is nowhere near as disastrous as is was
back then. I think we'll probably start to see some stability in confidence.

NEAL WOOLRICH: Rob Lake from Orex Recruiters says he's not surprised by the plunge in consumer

ROB LAKE: Retailers are telling us that sometime in mid-May the customer tap got turned off and
particularly at the discretionary end of the market. People just aren't spending like they were and
it's a confidence issue.

NEAL WOOLRICH: There are some pockets of goods news. Myer and David Jones are reporting higher
cosmetic sales. They argue that those sorts of items hold up better in a downturn as consumers
switch their spending away from higher-priced goods. Rob Lake says the early-, mid-year clearance
sales have had little effect and there's faint hope among retailers that the tax cuts that came in
from the first of July will stimulate spending.

ROB LAKE: We're hearing that the sales this year have been a bit disappointing and it's interesting
that David Jones have had a sale on the sale just last week. So they're doing everything they can
to get the numbers up. There's too many other drains on the household budget at the moment. That
food price inflation, interest rates and petrol.

NEAL WOOLRICH: And consumers aren't just tightening their belts at the check-out. Figures from the
bureau of statistics show that the value of home loans taken out in may dropped by six per cent.

Given the strong labour market and Australia's continuing economic growth consumers might be unduly
pessimistic at the moment. But Westpac's Bill Evans says the Reserve Bank won't be able to ignore
the drop in sentiment.

BILL EVANS: Even though that it's likely on the 23rd of July that we're going to see an elevated
inflation read for the June quarter which will probably mean the Reserve Bank's underlying
inflation rate that currently stands at 4.25 will be rising closer to 4.5.

That these other signals are suggesting that maybe the Reserve Bank's growth forecast that we saw
in early May will have to be revised down.

EMMA ALBERICI: Westpac's chief economist Bill Evans ending that report by Neal Woolrich.