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Bulletin

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are

reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

Consumer Sentiment fails to get any traction

This is a disappointing result. There has been enough positivenews around since the last survey, and generally over the last fewmonths, to have sustained an upswing in Consumer Sentiment.News that retail spending was boosted in the first half of theyear; unemployment remains low; the Government has released$1.9bn in fiscal compensation over the MayJune period; the

Reserve Bank had cut the overnight cash rate by 0.75% in May/June; and the President of the European Central Bank has beenpromising to do whatever it takes to save the Euro has beenunsuccessful in sustaining an upswing in sentiment.

Indicative of a more positive global outlook the share market hasrisen by 2.9% and the Australian dollar has risen from aroundUSD 1.02 to USD 1.05 since the survey in July, the latter alsoreflecting Australias attractive interest rate differential.

Rather, the Index seems to be settling in a cautiously pessimisticrange. This is the sixth consecutive month that the Index hasregistered below 100, averaging 96.2. This is unusual. The onlycomparable periods since the recession of the early 1990s are

in 200001 when the Index printed an average of 96.5 over aneight month period and in 200809 when it averaged 88.0 overa 16 month period. That most recent period coincided with theauthorities responding with a very aggressive fiscal expansion.In the current period both Federal and state governments areentering into substantial fiscal consolidations.

While the Reserve Bank did not surprise by holding rates steadyat its August Board meeting, consumer perceptions of the outlookfor interest rates have shifted. Media reports that the ReserveBank may have decided against future rate cuts are likely to haveunnerved households. For example, despite rates staying on holdthe confidence of respondents who hold a mortgage fell by 3.9%.

The print for August indicates that pessimists clearly outnumber

optimists. The Index is only 0.6% above the level in March thisyear which preceded the most recent rate cuts and the cashdisbursements. The failure of the Index to maintain any upswingraises the risk that the strong retail spending which we have seenin the first half of the year might be largely due to aggressivediscounting and the one-off boosts to income growth from thefiscal payments and rate cuts. The risk, as indicated by thisongoing under-performance of Confidence, is that retail spendingmight lose momentum in the second half of the year.

Confidence fell in every state except for Victoria with thesharpest fall being in Queensland, where there is considerablespeculation around the upcoming State Budget.

15 August 2012

The WestpacMelbourne Institute Index of ConsumerSentiment fell by 2.5% in August from 99.1 in July to 96.6

in August.

There were falls in four of the five components of the Index. Thesub-index tracking views on family finances compared to a yearago fell by 6.3% whereas the sub-index tracking expectationsfor finances over the next 12 months increased by 3.3%.Thesub-indexes tracking consumer views on the economic outlookboth deteriorated with the 12 month outlook down 3.1% and the5 year outlook down 2.7%. The sub-index tracking opinions on

whether now is a good time to buy a major household item fellby 3.6%. We have been particularly worried about householdsassessments of their finances over the next 12 months. It ismildly encouraging that this component has increased by 6.4%over the last two months, likely reflecting the direct boost fromfiscal payments and rate cuts, but it is still 7.2% below its read asrecently as March which coincided with the period of strong retailspending.

The Reserve Bank Board next meets on September 4. We do notexpect a rate cut. However, despite current media speculation,we do believe that the case for further cuts is likely to be clearby the December quarter. The critical issues will be around thesustainability of the recent surge in consumer spending; theresilience of the labour market; and developments in the worldeconomy. With fiscal policy consolidating and the Australiandollar likely to remain high, adjustments in monetary policy arelikely to be the only policy option available if further assistanceis required. Private sector interest rates are only slightly belowaverage levels. There is adequate scope for further monetaryassistance.

Todays report provides some gentle support for the prospect thatlower interest rates may be needed later in the year

Bill Evans, Chief Economist

Consumer Sentiment

60

70

80

90

100

110

120

130

60

70

80

90

100

110

120

130

Aug-90 Aug-94 Aug-98 Aug-02 Aug-06 Aug-10

indexindex

Sources: Westpac Economics, Melbourne Institute

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Consumer sentiment August 2012

avg* Aug 2010 Aug 2011 Jul 2012 Aug 2012 %mth %yr

Consumer Sentiment Index 101.7 119.2 89.6 99.1 96.6 2.5 7.8Family finances vs a year ago 90.0 95.5 71.8 83.5 78.2 6.3 9.0

Family finances next 12mths 108.6 119.0 87.0 88.9 91.8 3.3 5.5

Economic conditions next 12mths 90.2 127.1 73.2 95.8 92.8 3.1 26.7

Economic conditions next 5yrs 90.8 115.5 88.3 97.5 94.9 2.7 7.5

Time to buy a major household item 127.9 138.8 127.7 130.0 125.4 3.6 1.9

Time to buy a dwelling 122.3 119.3 114.6 128.8 118.5 8.0 3.4

Time to buy a vehicle 121.6 138.2 120.8 130.8 126.3 3.5 4.5

Source: WestpacMelbourne Institute *average over full history of the survey, all figures except dwelling and vehicle indexes are seasonally adjusted

Survey interviews are conducted by OZINFO Research on the telephone using trained interviewers. Telephone numbers and the household respondent are selected at ran-

dom. This latest survey is based on 1200 adults aged 18 years and over, across Australia. It was conducted in the week from 6 August to 10 August 2012. The data have

been weighted to reflect Australias population distribution. Copyright at all times remains with the Melbourne Institute of Applied Economic and Social Research.