Consumer confidence on the rocks

Consumers confidence slumped in February and consumers are now more pessimistic about the state of the Australian economy than they have been for more than a year, according to a survey by the Melbourne Institute released today.

The Westpac–Melbourne Institute Index of Consumer Sentiment fell by 5.5% in February to 97.4 points, the first time it has fallen below the 100 point line separating positive from negative sentiment since November 2006.

It follows data released yesterday showing business confidence dropped to its lowest level since the 11 September 2001 terrorist attacks last month. (See Business confidence plummets from yesterday’s Briefing.)

The big drop follows last month’s 0.25% interest rate rise by the RBA and suggests recent tough talking by the Federal Government on inflation is being heard by consumers.

Westpac chief economist Bill Evans says while the February decline in sentiment is significant, it is lower than the average 9.7% fall after previous interest rate rises.

The consumer confidence index is now 12.6% below its level at this time last year, and 15.5% below the average level of 2007.

It could be that consumers believe the bad medicine they are taking at the moment will pay off in the long run; while the index assessing the outlook for economic conditions over the next 12 months fell by 14%, the component assessing the economic outlook for the next five years rose by 10.3%.

Consumers in the US are also taking a more pessimistic view of the economic outlook there, although for opposite reasons. The weekly ABC News consumer confidence index has fallen four points this week to -37, its lowest point since November 1993.

The threat of recession and the crumbling housing market in recent weeks has seen the index drop by 17 points this year, its fastest decline since just before the 1990-1991 recession in the US.

In Australia, a 4.1% drop in commercial lending and 7% drop in leasing lending in December more than offset a 3.1% rise in personal finance and 0.5% rise in home lending.

And on the markets, at 12.20pm the S&P/ASX200 is down 0.3% on yesterday’s close to 5593.3 after being up by more than 50 points in the first hour of trading.