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Consumer optimism reaches GFC low

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Despite the RBA’s decision to keep rates on hold, consumer optimism has dropped for the second consecutive month, representing the largest two-month fall since March 2008, according to Westpac’s latest economic report.

The Westpac–Melbourne Institute Consumer Sentiment Index showed that consumer confidence fell by 5.7 per cent from 108.0 in May to 101.9 in June. The fall follows a similar 7 per cent drop in May 2010.

According to the report, confidence could drop further still, with 90 per cent of customers expecting more rate rises in the year ahead.

“The widespread optimism apparent at the start of the year has evaporated, giving way to a much more sombre mood,” Westpac senior economic Matthew Hassan said.

According to Mr Hassan, the shift in the Consumer Index over the last two months should not be ignored.

“Consumer sentiment has provided critical early warning signs in the past,” he said.

Mr Hassan said most recently, a 20 per cent slump in the Consumer Index was the first indicator to show a decisive weakening in 2008. Despite this, he said the recent collapse in sentiment was not an indicator of another recession, but rather a “cooling-off” from previous highs.

“It bears more resemblance in both magnitude and level terms to the weakening in sentiment in early 2005 – a decline that was followed by a moderation in consumption growth from above average (4.3 per cent/year in 2004) to slightly below average (2.9 per cent/year in 2005).”

Factors including the RBA's third consecutive rate hike of the year in May coupled with concerns about deteriorating conditions abroad, financial market turmoil, and uncertainty over the proposed Resource Super Profits Tax, contributed to the decline in consumer sentiment over May and June 2010.

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