A key measure of Australian consumer confidence fell in May, reversing some of the previous month's surge, as many consumers gave a thumbs down to a debt-fuelled budget unveiled by the government last week. Consumers were also unhappy with the central bank's decision to keep rates unchanged at 3 percent in May, and they remained worried about the wider economy and jobs, despite a rally in the local share market, a key consumer survey found on Wednesday.
The survey of 1,200 people by the Westpac-Melbourne Institute showed its index of consumer sentiment fell 4.3 percent to 88.8 between April and May, its second-biggest fall following the release of a budget in the last 10 years.
"The fall provides a reminder that confidence can be fragile especially in an environment of rising unemployment," said Su-Lin Ong, senior economist at RBC Capital. Bill Evans, chief economist at Westpac, said he suspected consumers felt that stimulus spending was petering out, leaving tax-payers with a mountain of state debt to pay off.
The May 12 budget contained no fresh stimulus measures, after the government announced more than A$52 billion ($40 billion) in handouts and additional spending in the past few months. But it delivered Australia's biggest-ever deficit, foreshadowed a decade of borrowing and predicted unemployment to almost double to 15-year highs of 8.5 percent by 2010/11.
Australians usually take a dim view of governments who rack up huge deficits. That has been reflected in a slide in Prime Minister Kevin Rudd's poll ratings as he struggles to cushion the economy from a damaging recession due to the global downturn. RBC Capital's Ong said the Reserve Bank of Australia (RBA) was likely to keep rates unchanged next month, despite the drop in confidence.
"We suspect that they will remain on the sidelines in the coming months to assess the mixed local and global data and the ongoing impact of domestic monetary and fiscal stimulus," she said. RBA Governor Glenn Stevens on Tuesday said rates were at historically low levels and pointed to clear signs of a global economic pick-up. He has cut the cash rate by 425 basis points since September to a record low of 3 percent.
Markets expect him to keep rates steady on June 2, but an expected rise in the jobless rate and falling business investments could see him ease policy later in the year. Also, with the government running out of ammunition to mount further stimulus, the focus for any further policy action is falling on the central bank.
"That puts the emphasis back on to monetary policy which will need to be seen to be responding when the unemployment rate tracks from 5.5 percent to the government's forecast of 8.25 percent over the course of the next 12 months," Evans said. The jobless rate has risen 1.5 percent points to 5.4 percent since February 2008.
Prospects of a weakening jobs market led to a rather moderate rise in wage costs for the first quarter. Data from the government on Wednesday showed first-quarter wage costs rose 0.8 percent, in line with expectations, but slowing from a revised 1.3 percent rise in the fourth quarter. For the year, it was up 4.2 percent, again in line with expectations. Analysts and the RBA expect wage growth to ease given the softening jobs market.
"The wage data should have few implications for the monetary policy outlook," said Helen Kevans, economist at J.P. Morgan. "Labour costs and inflation are currently not the RBA's primary policy concern."