Chief economist update: Australians all let's not rejoice

"I'm walking on sunshine (Wow!)
I'm walking on sunshine (Wow!)
I'm walking on sunshine (Wow!)
And don't it feel good."

Sadly, Australians are not singing and dancing to this upbeat classic by Katrina and the Waves.

The Westpac/Melbourne Institute consumer sentiment survey shows that consumer pessimism has deepened in January.

The consumer index fell from a reading of 95.1 in December 2019 to 93.4 in the first month of 2020 - the second consecutive month of decline, the fifth straight month of below 100 readings (pessimists outnumber optimists) and the lowest reading since July 2015 - the days of wine and Grexit.

Wait there's more. According to the consumer sentiment report: "Since the lows of the Global Financial Crisis where the Index averaged only 89 over a 15 month period from March 2008 to May 2009 there have only been seven monthly readings where the Index has printed below 93.4."

More ... plus. The drop in consumer sentiment is both unsurprising - given the widespread coverage about the widespread devastation about wildfires burning across Australia in December and January - and surprising - the survey was taken between 13 and 17 January - when there was widespread rain, the Morrison government's increased spending and the US-China phase one deal was signed.

The details of the report reveal that while Australian consumers' responses to "family finances vs a year ago" and "family finances next 12mths" improved in January from December - a function perhaps of lower interest rates, rising house and equity market prices - their outlook on "economic conditions next 12mths" and over the next five years has deteriorated by 5.4% and 3.7% in the month of January.

There's good news in the labour market - the unemployment expectations index fell by 2.9% in the month of January from December. But the reading of 134.0 points is above its long-term average of 130.0 and is 8.4% higher than a year ago.

The Australian Bureau of Statistics (ABS) will release its December 2019 update on the labour market today. However, the estimates are likely to be distorted by the bushfires so take extra care with interpretations.

The latest reading on consumer sentiment supports expectations for more RBA rate cuts.

Then again, another one (or two) more reduction in the official cash rate from the current record low of 0.75% -- the RBA has explicitly stated it won't go to zero - might have the opposite result on consumer sentiment.

Recall that the RBA lowered interest rates in June 2019 - consumer sentiment fell from 101.3 in May to 100.7 in June - and in July 2019 - consumer sentiment fell to 96.5 points, rose to a reading of 100.0 before starting to slide again to 98.2 in September and 92.8 in October.

The RBA's October rate reduction failed to lift sentiment enough to lift the index above 100 -- or where optimists outnumber pessimists.

Consumer confidence influences households' inclination to spend, save and borrow.

Further RBA rate reductions is a double-edge sword - improving sentiment through it wealth effect on rising equity market and property prices but at the same time signalling that there's something very wrong in the economy.

The Morrison government's increased fiscal spending offers hope.

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