Chief economist update: Negative bang for RBA, government's buck

"Pessimism becomes a self-fulfilling prophecy; it reproduces itself by crippling our willingness to act."
- Howard Zinn

Taken after the Reserve Bank of Australia's (RBA) third interest rate reduction this year which brought the official cash rate to 0.75% and the Morrison government's July tax rebate, the latest Westpac-Melbourne Institute consumer sentiment survey delivers a grim warning to us, Australians all.

The consumer sentiment index fell from a reading of 98.2 in September to 92.8 in October - the lowest reading since July 2015 - indicating that the number of pessimists is increasing.

Instead of lifting confidence, the RBA's relatively aggressive rate cuts appear to have done the opposite (as I feared). Include, too, my earlier rant that the Morrison government's tax rebates work only for those who have jobs and pay taxes.

There was pessimism everywhere in the details of the survey, which shows: Family finances versus a year ago dropped to 80.2 in October from 84.3 in the previous month; family finances next 12 months (93.3 from 96.9); economic conditions next 12 months (87.1 from 92.6); economic conditions next five years (88.9 from 97.8); time to buy a major household item (114.5 from 119.6).

While the unemployment expectations index improved to 131.8 in October from 133.6 in September - a positive - it's 7.3% higher than last year and above the long-term average of 130.

Consumer sentiment regarding housing - "time to buy a dwelling" - dropped by 5.4% in October. Why wouldn't it? Despite lower borrowing costs - and abstracting from the banks not passing on the full RBA rate reductions - house price expectations have increased by 5.9% over the month and a whopping 36.1% over the year.

The worry is that the drop in consumer sentiment because of concerns over the domestic economy becomes self-feeding; a condition described by the 'rational expectations theory', which posits "that individuals base their decisions on three primary factors: their human rationality, the information available to them, and their past experiences. It suggests that people's current expectations of the economy are, themselves, able to influence what the future state of the economy will become."

Pessimistic consumers are not going to spend - retail sales remain sluggish (up just 2.6% in the year to August, down from its recent high of 3.7% recorded last year and way below the 6%-8% rate during the boom time before the GFC - and they certainly, aren't going to borrow to spend - total private sector credit slowed to 2.9% in the year to August (after two rate cuts at the time) with personal credit down for the 47th month in a row to 3.5% and housing credit growth continuing to slow to 3.1%.

No wonder business confidence is also down. The NAB Business Survey shows that business confidence fell to a reading of zero (0) in September from 1 in the previous month - below the long-run average of 6.

Clearly, lower and lower interest rates are having very limited effect on sentiment, spending and borrowing, justifying RBA governor's Lowe call on his fiscal counterparts for help.

In a perverse reaction, further RBA interest rate cuts (and onwards toward QE) might only deepen consumers' sense of pessimism.

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