‘Cost-of-living nightmare’: Consumer confidence slumps to historic low

Households will face “recession-like” conditions next year, a leading forecaster has warned, as fresh evidence shows consumers are losing confidence in the economy amid growing cost-of-living pressures.

A key gauge of consumer sentiment has fallen to a historic low after the Reserve Bank lifted official interest rates to a 15-year high last week and average petrol prices pushed above the $2.30 a litre mark.

The latest Westpac-Melbourne Institute consumer sentiment index, released on Tuesday, fell 4.7 per cent in October to 80.4 points – its lowest level since April.

But among the 40 per cent of people who responded to the survey after the RBA’s fourth rate hike this year, the index crashed to just 67.2 points – the worst result since November 1990 when the economy was in deep recession.

Westpac economist Matthew Hassan described the huge fall following the rates decision as “alarming” and said it showed pessimism was “intense and widespread” among respondents.

“Australian consumers remain stuck in a cost-of-living nightmare that seems to have no end in sight,” he said.

Even when all survey respondents before and after the rate hike were included, the index level was the 39th-worst result since the bank’s monthly survey began in the early 1970s.

A sub-index tracking assessments of “family finances versus a year ago” fell 8 percentage points to what Hassan called an “extreme low” in October.

But consumers do not expect cost-of-living pressures to ease up any time soon; the study’s measure for expected “family finances over the 12 months” also dropped sharply in the month.

Australia’s gloomy consumers are also on high alert for further interest rate increases; over 80 per cent of respondents expect mortgage rates to rise over the next year.

“The latest RBA move looks to have badly rattled consumers,” said Hassan.

A separate report released on Wednesday shows leading forecaster Deloitte Access Economics has cut its expectations for Australia’s economic growth to 1.7 per cent in 2027-28, down from 1.9 per cent forecast three months ago. Last financial year the economy grew by 2.1 per cent.

The report’s lead author, Deloitte partner Stephen Smith, said while the economy may avoid a near-term recession for households caught between high inflation, rising interest rates and weak growth, “it will feel like one”.

He says the key drivers of that growth, including government spending, data centre construction and spending by older and wealthier Australians “appear largely impervious to higher interest rates”.

That means the RBA’s actions to reduce inflation by lifting interest rates will pile pressure on economic sectors that will respond to higher borrowing costs, especially households.

“The adjustment will therefore be concentrated among lower-income and mortgaged households, dwelling construction, and business investment outside the AI ecosystem,” Smith said.

“While Australia is expected to avoid a recession in the aggregate, households will continue to experience recession-like conditions. That divergence will weigh on discretionary consumer spending, widen differences across sectors and intensify political pressure.”

The Albanese government is under intense pressure to tackle elevated inflation following this year’s four interest rate increases and the threat of more to come. The opposition and many economists claim undisciplined government spending is making it more difficult for the Reserve Bank to reduce price pressures across the economy.

Treasurer Jim Chalmers, who is visiting Japan to promote trade and investment, defended the government’s budget management, saying public (or government) demand growth has been easing.

“Like every country … we are being impacted by this prolonged war in the Middle East, pushing up inflation and weighing heavily on growth at the same time,” he said.

The consumer sentiment survey showed fears about job losses are rising. The Westpac–Melbourne Institute Unemployment Expectations Index, released as part of the report, rose in October and is now well above the long-term average (higher values on this index mean more consumers expect unemployment to rise over the year ahead).

While the labour market has been fairly resilient this year, the unemployment rate climbed to a five-year high of 4.6 per cent in August.

As Labor’s spending comes under scrutiny, one of the world’s most important financial institutions, the International Monetary Fund, warned against using broad-based subsidies – such as the government’s cuts to fuel excise earlier this year – to deliver cost-of-living support.

The fund’s twice-yearly World Economic Outlook said broad subsidies are inefficient and can cause lasting damage to government budgets; targeted relief to lower-income families hardest hit by high inflation is much more efficient.

“Assistance, when warranted, should be temporary and delivered through targeted income support measures, ideally using existing social protection systems that can be scaled up quickly,” the fund said.

Cut through the noise of federal politics with news, views and expert analysis. Subscribers can sign up to our weekly Inside Politics newsletter.