Australian consumer sentiment took a hit in July

Australian consumer confidence slumped in July, weighed down by concerns surrounding the Australia's federal election outcome and the UK Brexit vote.

The Westpac-MI consumer sentiment index fell by 3% to 99.1, leaving it at lows not seen since April. With the index now below 100, it indicates that pessimists outnumber optimists, albeit by a slim margin.

While it has now fallen for the past two months, the index remains 7.4% above the levels of a year earlier.

According to Westpac, four of the five survey subindices weakened during the month, led by steep declines in perceptions towards family finances, along with the near-term economic outlook.

The internal movements of the survey are shown in the table below, supplied by Westpac.

While most components weakened in July, all bar the subindex on whether now is a good time to buy a major household item are now higher than a year ago.

If you look at the level of each individual component, while perceptions towards the economic outlook have improved significantly over the past year, they still remain deep in negative territory.

Clearly we remain pessimistic about the economy, despite recent improvements in the labour market and GDP growth. Perhaps we got too much of a good thing in the immediate years leading up to, and following, the global financial crisis.

Perceptions towards family finances compared to a year ago are also very pessimistic, although that changes significantly when looking at the year ahead.

Outside of the main survey subindices, views towards housing market conditions came in mixed with the house price expectations index jumping by 4.3%, leaving it at the highest level seen since August 2015.

Despite that view, and somewhat surprisingly, it was partially offset by a 1.8% drop in the index measuring whether now was a good time to buy a dwelling.

Unemployment expectations also increased by 1.9% -- indicating respondents think labour market conditions will weaken -- although this only partially reversed declines registered in previous months.

Despite the back-to-back declines, Bill Evans, Westpac's chief economist, believes that the July result was resilient all things considered.

"With the major events of ‘Brexit’ and prolonged election uncertainty it is not surprising to see a fall in the index," says Evans. "In fact, given these developments, this fall appears to be surprisingly modest."

With the survey conducted between July 4 to 7, a period that saw financial markets rebound strongly after initially plummeting in the immediate aftermath of the Brexit vote, Evans believes this may have cushioned the impact on overall sentiment levels.

However, this may have been partly mitigated by uncertainty generated from the inconclusive federal election result, says Evans.

"Election uncertainty persisted throughout most of the survey period," he said. "Respondents would have been particularly unnerved about the prospect of an inconclusive election result given the experience during the last ‘hung’ Parliament in 2010 to 2013."

Despite falling back in recent months, Evans believes there's reason for optimism looking ahead.

"Since the end of the survey period we have seen some welcome political certainty with the prospect of a hung Parliament avoided. It is reasonable to speculate that had the survey been conducted over the last few days the results would have been more positive," says Evans.

He also believes that a likely interest rate cut from the Reserve Bank of Australia in August could also support sentiment levels, particularly given the relationship seen during past easing cycles.

"We expect the Reserve Bank to move to cut rates again following its meeting on August 2," he says.

"Following the cut in May the index surged by 8.5% putting it firmly in positive territory above 100, indicating optimists outnumber pessimists.

"With the index currently poised only slightly below 100 we can be reasonably confident that it will be back above a 100 next month despite having to negotiate two major shocks in ‘Brexit’ and election uncertainty," he adds.

The table below, supplied by Westpac, shows the internal movements in sentiment levels by sex, age, home ownership, occupation, political persuasion, household income and region.

Read more posts on Business Insider Australia »