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Bulletin

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are

reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

Consumer Sentiment disappoints

This is a very surprising result. When we saw the 5.2% increase

in the Index in November, which came despite the Reserve Bank

surprising by holding rates steady, it appeared that sentiment

was finally starting to respond to the accumulated series of rate

cuts since November last year. With that in mind it was therefore

reasonable to expect that the Index would respond quite positivelyto the rate cut the Reserve Bank delivered last week.

Instead the Index fell back to near its October level and is now

3.2% below its November 2011 level. Households with a mortgage

did respond positively to the rate cut with their confidence rising

by 4.4%. However other respondents were quite downbeat.

Confidence of those folks who are renting properties fell 9.1%

while for those who wholly own their property confidence was

down 10.9%.

In this survey we also receive a measure of the major news

categories which influenced respondents and how each category

was assessed. The news items which had the largest impact were

around economic conditions. An impressive 60% of respondentsrecalled news items on the economy. Next most prominent

were interest rates (28.9% of respondents); budget and taxation

(20.7%); international economic conditions (20.6%); inflation

(13.9%); and employment (11.9%).

Compared to last time this was surveyed, in September, news

recall levels were lower for every category except interest rates.

There was a particularly large fall in the proportion of consumers

recalling news on budget and taxation (from 39.8% in September

to 20.7% in December). Presumably respondents are becoming

less aware of news on the introduction of a carbon pricing

scheme and the mining tax, although the respondents that did

recall news on these categories assessed it just as negatively as

in September.

Respondents continued to view news as quite negative around

economic conditions; international conditions; and employment.

Apparently the fall in headline unemployment from 5.4% to 5.2%

which was announced during the survey week had limited impact

on respondents.

On the other hand, as expected, there was a big lift in

respondents assessments of the news on interest rates.

Unfortunately this was not sufficient to markedly improve

confidence more generally around economic conditions or

employment.

The rate cut has further boosted confidence around whether

now is a good time to purchase a house with the index trackingsentiment on this improving by a further 1.9% to reach its highest

level since September 2009. That year Australian house prices

increased 14% and were a major factor behind the Reserve Banks

12 December 2012

The Westpac Melbourne Institute Index of ConsumerSentiment fell by 4.1% in December from 104.3 in

November to 100.0 in December.

decision to begin the rate hike cycle which lasted until November

2010. The authorities will be pleased that housing confidence has

been building although ongoing pessimism around the economy

and employment will limit the impact on actual housing market

activity.

Of the five components of the Index only one increased.

Presumably because of the direct impact of the rate cut,respondents were more confident around the outlook for their

finances (this sub-index up 4.6%) while the sub-index tracking

views on finances compared to a year ago were down 7.2%. The

sub-indexes tracking the one and five year outlooks for economic

conditions were down 4.3% and 8.9% respectively; and, in a

disappointment for retailers, the sub-index tracking views on

whether now is a good time to purchase a major household item

fell by 4.8%.

The September survey also included additional questions on

consumers savings preferences. There was a fall in the proportion

of respondents who favour bank deposits, down 4.1% from a

record 39% in September to 34.9% in December. In contrast we

saw a 4.1% jump in the proportion of respondents who favour

real estate to 24.0%. Apart from June this year, when a quarter of

consumers favoured property, this represents the highest reading

since 2005.

The Reserve Bank Board next meets on February 5. For some time

it has been our expectation that the Board will decide to cut rates

again in the March quarter. This report strongly supports that

case. Despite another rate cut and improving sentiment towards

housing, consumers remain cautious and particularly concerned

around the outlook for the economy and for employment. The

Reserve Bank has two more months to assess the impact of its

interest rate moves before its next meeting. Evidence to date is

that low rates are not generating much traction with households.

Hence there is likely to be a decision to further ease rates in

February or March

Bill Evans, Chief Economist

Consumer Sentiment

60

70

80

90

100

110

120

130

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70

80

90

100

110

120

130

Dec-90 Dec-94 Dec-98 Dec-02 Dec-06 Dec-10

indexindex

Sources: Westpac Economics, Melbourne Institute

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Consumer sentiment December 2012

avg* Dec 2010 Dec 2011 Nov 2012 Dec 2012 %mth %yr

Consumer Sentiment Index 101.7 111.0 94.7 104.3 100.0 -4.1 5.6

Family finances vs a year ago 90.0 87.6 79.9 91.8 85.2 -7.2 6.6

Family finances next 12mths 108.6 110.9 100.3 100.2 104.8 4.6 4.5

Economic conditions next 12mths 90.3 115.7 82.5 96.6 92.4 -4.3 12.1

Economic conditions next 5yrs 90.8 95.6 88.3 96.8 88.2 -8.9 -0.1

Time to buy a major household item 127.9 145.1 122.8 136.1 129.6 -4.8 5.6

Time to buy a dwelling 122.5 118.3 123.4 139.8 142.2 1.7 15.2

Time to buy a vehicle 121.8 136.1 119.3 137.5 138.4 0.7 16.0Source: WestpacMelbourne Institute *average over full history of the survey, all figures except dwelling and vehicle indexes are seasonally adjusted

Survey interviews are conducted by OZINFO Research on the telephone using trained interviewers. Telephone numbers and the household respondent are

selected at random. This latest survey is based on 1200 adults aged 18 years and over, across Australia. It was conducted in the week from 3 December to

9 December 2012. The data have been weighted to reflect Australias population distribution. Copyright at all times remains with the Melbourne Institute of

Applied Economic and Social Research.