Australian consumer confidence stays deeply negative

CreditorWatch Chief Economist Ivan Colhoun has warned that Australian consumer confidence remains deeply negative as households face higher borrowing and living costs. He also flagged weaker business conditions, despite a steady headline reading in the latest NAB Business Confidence Survey.

Consumer sentiment data for May and June show only a brief, modest improvement before confidence fell again. It rose 3.5% in May after a sharp drop in April, then declined 2.9% in June to levels close to the weakest in the survey's 50-year history.

Colhoun attributes the deterioration in household sentiment to sustained pressure from higher interest rates, elevated energy prices and broader cost-of-living strains. He says government fuel excise relief has provided only limited support for household finances and has not changed views on the broader economic outlook.

The latest readings show both current and expected family finances worsening. Westpac's measure of expectations for the economy over the next 12 months has fallen more than 20% over the past year, underscoring concern about the near-term outlook.

Housing-related sentiment has also weakened. The "time to buy a dwelling" index dropped 16.1% in May, after several months of easing, as tax changes and higher borrowing costs weighed on buyers.

Unemployment expectations provide a contrasting signal. Colhoun says fears about job losses spiked alongside the jump in fuel prices linked to the Iran conflict, but have since stabilised rather than continuing to rise.

In his latest consumer confidence commentary, Colhoun argues that the Reserve Bank of Australia is now in a monitoring phase after its May rate increase. He cites recent Board minutes showing policymakers view financial conditions as increasingly restrictive and want time to assess household and business responses before deciding on any further tightening.

Household spending data complicate the picture. Official figures showed a 1.1% month-on-month fall in April, more than double economists' expectations, though Colhoun described the result as "headline-ugly but distortion-heavy".

He points to lower petrol prices after an earlier spike, the unwinding of food stockpiling in March and the effect of air travel refunds on measured spending. Excluding Transport and Food, spending fell just 0.2% in April after a solid rise in March.

Even so, the data suggest households are becoming more defensive. Discretionary categories such as Clothing and Footwear are soft, and the Australian Bureau of Statistics has reported more consumers trading down to cheaper and generic products.

Colhoun sees energy prices and the Middle East conflict as pivotal to the path of both inflation and household demand in coming months. He argues that a durable peace agreement could bring relatively quick relief on fuel and related surcharges, easing pressure across supply chains.

Business survey data reinforce the sense of an economy under strain. The NAB survey for May showed headline business conditions unchanged at +3 and confidence rebounding by nearly 10 points from very weak levels, but Colhoun says the aggregate figure masks deterioration across several states and sectors.

Conditions fell in Queensland, Western Australia and Victoria, and remained subdued in New South Wales. Manufacturing, Transport and Retail all reported weak conditions, while Recreation and Personal Services also softened under the weight of higher rates and fuel costs.

A sharp rise in the Tasmanian component of the survey, which Colhoun describes as volatile, prevented an overall decline in the national conditions index. Capacity utilisation, a key indicator of demand and potential labour market turning points, eased again in May and sits below recent peaks, although it remains elevated by historical standards.

Price and cost readings in the NAB survey eased from March and April but remain above levels consistent with the RBA's 2.5% inflation target. Colhoun says the recent 4.75% minimum and award wage decision will add to business cost pressures and further complicate the central bank's task.

Mining continues to record strong conditions, while Finance, Property and Business Services posted the strongest readings in May, which Colhoun links partly to restructuring and tax-related activity after budget changes. He remains sceptical that the economy is broadly capacity-constrained outside specific labour and housing markets.

"Either way, no change in interest rates is likely at next week's RBA Board Meeting, though my base case remains of a long, slow tightening cycle," said Colhoun, Chief Economist, CreditorWatch.