Thursday, December 15, 2011

Bleak Christmas? Europe is scaring us

Christmas is looking bleaker after the latest cut in interest rates failed to lift consumer confidence.

The Westpac Melbourne Institute consumer sentiment index slipped 8 per cent after last week’s interest rate cut instead of bouncing as usually happens following interest rate easings.

“The most likely explanation is that concerns over the reasons behind the cut have overwhelmed the perceived benefits of the cut” said Westpac chief economist Bill Evans.

Asked which news items they recalled in the past month only 31 per cent remembered hearing about interest rates. But 60 per cent had heard about economic conditions and 56 per cent about international conditions.

“The constant stream of news on developments in Europe will have had an impact. The news on economic conditions, international conditions and budget and taxation was considered the worst since 2008,” Mr Evans said.

The proportion of people believing now was a good time to buy a major household item slipped 10 per cent, meaning pessimists outweighed optimists for the first time since the 2008...

Views about economic conditions in the year ahead slipped 19 per cent, views about economic conditions over the next five years slipped 14 per cent.

“Risk aversion increased markedly. When asked about the wisest place for savings 27 per cent nominated paying down debt, up from 19 per cent in September. It’s the second highest result on result on record.”

ComSec economist Savanth Sebastian said the the new conservatism was disturbing.

“Consumers are clearly batting down the hatches, using savings to cut their debt levels, unwilling to take on risk and curbing spending.”

“They harbour reservations about what lies ahead. If consumer sentiment doesn’t lift, retailers and policymakers alike will have genuine reasons to be very worried.”

Reserve Bank deputy governor Ric Battellino told a Sydney conference the European problems were likely to worsen and spill over into the Australian economy.

“It is possible a combination of credible fiscal commitments by governments and short-term support from the European central bank and International Monetary Fund will provide a solution that is relatively benign,” he said.

“However, other outcomes, including some disruptive event such as a change in the composition of the euro area, cannot be ruled out.”

“We need to remain alert to the risks.”

Published in today's SMH

European Financial Developments - Ric Battelino

Related Posts

. Parkinson: European recession

. Eurozone debt: Who owes what to whom?

. Only one more cut? ABE forecasts