Consumer confidence has plunged as sharemarkets fall and the cost of living soars because of surging inflation and rising interest rates.
The Westpac-Melbourne Institute consumer sentiment index toppled 4.5% in June, reaching 86.4 – nearly as low as the levels seen during the global financial crisis and at the height of the Covid pandemic.
Excluding the Covid crisis, the figure is the worst since February 2009.
Figures of less than 100 indicate pessimism among consumers, while an index of more than 100 indicates optimism.
It follows a horror day on the Australian share market on Tuesday, when the ASX200 index fell 360 points in the first 15 minutes of trade before closing 246 points down, or 3.55%.
Westpac’s economic spokesperson, Bill Evans, said the survey showed “a clear picture of a slump in sentiment being driven by rising inflation; an associated lift in interest rates; and a loss of confidence around the economic outlook, both here and abroad”.
Many respondents were concerned about rising inflation and 58% expected interest rates to rise more than 1% in the next year.
Minimum wage earners will receive a 5.2% pay increase after a decision by the Fair Work Commission on Wednesday. But economists say they will still go backwards, with the governor of the Reserve Bank of Australia, Philip Lowe, predicting inflation could rise as high as 7% before interest rate increases bring it under control.
“Today’s wage increase will be absolutely welcome for minimum wage earners and is unlikely to contribute to a wage-price cycle,” Anneke Thompson, the chief economist at credit monitoring agency CreditorWatch, said.
“As it stands it will only result in minimum wage earners barely keeping up with price increases and rising interest rates.”
However, businesses that are already stretched may struggle to cope with surging costs, she said.
In some sectors such as construction the price of raw materials has exploded by as much as 50%.
“While it’s unlikely that today’s decision by the FWC will directly cause any insolvencies, businesses already trading unprofitably will now need to pay their workers more,” Thompson said.
“This leaves business owners with some tough decisions to make as economic conditions set to worsen before over the next few months.”
She said hospitality and arts businesses, which have already faced several tough years due to the pandemic, should brace for further pain as consumers cut discretionary spending.
“So far, spending by consumers in Australia has held up well, but this is primarily due to ‘rebound’ spending post- lockdown, and should only be viewed as a temporary boost before consumers assess their financial situation and reign in spending ahead of a long winter,” she said.
Business confidence is also falling, a separate survey released by National Australia Bank on Tuesday shows.
It tumbled four points in May but was still positive, at 6 points, just above the long-term average of 5.4.
Harry Ottley, an associate economist at the Commonwealth Bank, said the gap between business confidence and consumer confidence was the widest since 1997.
But he said the gap will narrow as consumers tighten their belts.
“We expect the looming economic challenges of rising inflation, rising interest rates and a general cooling of the economy to weigh on consumer spending and this will likely flow through to business confidence,” he said.