Westpac Banking : MI Consumer Sentiment December (PDF 73KB)

BULLETIN

15 December 2021

Consumer optimism holds in positive territory

The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 1.0% to 104.3 in December from 105.3 in November.

The index remains comfortably in positive territory where optimists outnumber pessimists.

There was a clear difference in responses between the states hit hardest by recent Delta outbreaks and the rest of Australia. Both NSW and Victoria posted significant falls (down 3.6% and 3.5% respectively) while sentiment was up in Queensland (3.4%), WA (3.2%) and SA (7.1%).

While high vaccination rates have allowed the 'Delta states' to reopen, there appears to be a heightened sensitivity to virus developments in those states where there is likely more concern about the newly emerging Omicron strain and the continued circulation of COVID locally.

A positive national Index is very important for the strong growth outlook we see for 2022 which is dependent on a surge in consumer spending, as households re-emerge from restrictions and draw down on the large savings accumulated through the COVID lockdown periods.

The December survey detail suggests there are other reasons, aside from the recent developments around Omicron, making consumers somewhat more cautious.

Every quarter we ask questions about which news topics which attracted attention and whether consumers viewed the news as favourable or unfavourable. Here the news was mixed.

We found a sharp increase in awareness of inflation.

In December 2020 only 5% of respondents recalled any news on inflation. This has lifted to 21%, exceeded only by news on employment (33%) and economic conditions (32.5%). Assessment of the quality of inflation news has deteriorated sharply from 56% describing the news as good a year ago compared to 71% describing it as bad in the latest survey.

There has been a similar shift in the assessment of news around interest rates (17% respondent recall). A year ago, 58% of consumers reported good news on interest rates but now 60% are reporting negative news on this front.

On the other hand, the assessment of news around the wider economy and employment remains positive, albeit somewhat softer than earlier in 2021.

The Westpac MI Unemployment Expectations Index jumped 9.3% to 104.1, following an 11% fall in November to a 26 year low (recall that lower reads mean more consumers expect the unemployment rate to fall over the next 12 months). Over a year of positive sentiment towards the jobs market the December print is still 6.2% below the average for 2021.

The components of the headline sentiment index show the December decline was led by a sharp 5.3% fall in the 'time to buy a major item'.

Consumer Sentiment Index

130	index				index	130
120						120
110						110
100						100
90						90
80						80
70	Sources: Westpac Economics, Melbourne Institute			70
Dec-05	Dec-09	Dec-13	Dec-17	Dec-21

There was a milder softening in views on the economy - the 'economic outlook, next 12 months' sub-index down 1.6% and the 'economic conditions, next 5 years' sub-index down 0.5%.

We saw modest gains in indexes tracking actual views on family finances - the 'finances, next 12 months' sub-index up by 2.1% and the 'finances vs a year ago' sub-index up by 1.0%.

The sharp fall in "time to buy a major household item" probably reflects a lift in virus-related concerns, along with other factors such as supply bottlenecks; price increases and some degree of saturation as spending patterns have been strongly biased in favour of purchases of durables over services during COVID.

There was a sharp fall in the 'time to buy a dwelling' index (down by 10.2%). This followed the unexpected surge last month (up 9.4%). The December print confirms the downward trend in this index since late last year as affordability continues to be squeezed in all markets. All states recorded significant index declines in December.

We suspect the affordability issue, which appears to have been an increasingly important factor since the Index peaked last November (now down 38%), may now be starting to weigh on price expectations as well.

The Westpac Melbourne Institute Index of House Price Expectations fell by 1.3% and is now 8% off its peak in April this year, albeit still at a very bullish level at 150.6.

The stand-out state since the national peak in the Index in April has been Queensland where expectations have increased by 1.3% whereas they have fallen in the other states - NSW (-5%); Victoria (-16.8%); WA (-14.4%); and SA (-25%).

Finance data has shown a clear rebalancing of activity away from owner occupiers towards investors. The cooling of the House Price Expectations Index may be showing some early signs of a more cautious investor.

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.

Bulletin

1

15 December 2021

The December survey also points to a notable lift in risk aversion across the consumer sector. Every quarter we ask additional questions about where consumers see the 'wisest place for savings'.

'Safe' options such as 'deposits' and 'pay down debt' have dominated over the last two years but December saw a further lift, particularly in the proportion nominating 'pay down debt' which hit 22.1% (up from 16.3% a year ago).

Conversely, consumers have become more cautious of 'riskier' options, particularly 'real estate' with only 7.3% (25 year low) nominating this as the wisest place for savings. We expect that this question largely reflects affordability concerns rather than expectations of capital gains.

The Reserve Bank Board next meets on February 1.

This will be a very important meeting since the Board will be using economic forecasts that have been refreshed from early November. The current forecasts for underlying inflation in 2022 (2.25%) and wages growth (2.5%) appear to be overly cautious. Indeed, if the underlying inflation rate for the December quarter, which is due on January 25, prints a 0.6% similar to the one in the September quarter, actual underlying inflation will already have reached 2.3% (subject to any rounding). It would be difficult for the Bank to maintain a 2.25% forecast for 2022 in such circumstances. A lift in the forecast to, say, 2.5% will mean the Bank is forecasting a return to the middle of the target band a year earlier than currently anticipated.

In that regard it is interesting that the Governor excluded a date from his final paragraph on the policy outlook in his Statement following the December Board meeting, having previously referred to 2024 (and end 2023 in November) as the likely timing for a return to the conditions required to justify a rate increase.

We do not expect any action or commitment on rates at the meeting, but we do expect the Board to lower its bond purchase pace from $4 billion per week to $2 billion with a commitment to review regularly.

Bill Evans, Chief Economist, ph (61-2) 8254 8531

Consumer Sentiment - December 2021

Item	avg*	Dec 2019	Dec 2020	Nov 2021	Dec 2021	%mth	%yr
Consumer Sentiment Index	101.4	95.1	112.0	105.3	104.3	-1.0	-6.9
Family finances vs a year ago	89.3	81.4	96.1	88.1	89.0	1.0	-7.4
Family finances next 12mths	107.5	98.1	108.9	108.9	111.2	2.1	2.1
Economic conditions next 12mths	91.1	89.6	111.9	106.6	104.9	-1.6	-6.3
Economic conditions next 5yrs	91.9	91.2	121.1	111.0	110.4	-0.5	-8.8
Time to buy a major household item	126.5	115.4	122.2	111.9	105.9	-5.3	-13.4
Time to buy a dwelling	118.6	112.3	124.2	91.1	81.9	-10.2	-34.1
Unemployment Expectations Index	129.8	138.0	106.3	95.3	104.1	9.3	-2.1
House Price Expectations Index	124.8	140.1	143.7	152.7	150.6	-1.3	4.8

Source: Westpac-Melbourne Institute.

*avg over full history of the survey, all indexes except 'time to buy a dwelling', 'unemployment expectations' and 'house price expectations' 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 random. This latest survey is based on 1200 adults aged 18 years and over, across Australia. It was conducted in the week from 6 December to 9 December 2021. The data have been weighted to reflect Australia's population distribution. Copyright at all times remains with the Melbourne Institute of Applied Economic and Social

Research.

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.

Bulletin

2

DISCLAIMER

© Copyright 2021 Westpac Banking Corporation

Things you should know.

Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141 ('Westpac').

Disclaimer

This material contains general commentary only and is not intended to constitute or be relied upon as personal financial advice. To the extent that this material contains any general advice, it has been prepared without taking into account your objectives, financial situation or needs, and because of this, you should, before acting on it, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs, and, the disclosure documents (including any product disclosure statement) of any financial product you may consider. Certain types of transactions, including those involving futures, options and high yield securities give rise to substantial risk and are not suitable for all investors. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. This material may contain material provided by third parties. While such material is published with the necessary permission none of Westpac or its related entities accepts any responsibility for the accuracy or completeness of any such material. Although we have made every effort to ensure the information is free from error, none of Westpac or its related entities warrants the accuracy, adequacy or completeness of the information, or otherwise endorses it in any way. Except where contrary to law, Westpac and its related entities intend by this notice to exclude liability for the information. The information is subject to change without notice and none of Westpac or its related entities is under any obligation to update the information or correct any inaccuracy which may become apparent at a later date. The information contained in this material does not constitute an offer, a solicitation of an offer, or an inducement to subscribe for, purchase or sell any financial instrument or to enter

a legally binding contract. Past performance is not a reliable indicator of future performance. 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 ultimate outcomes may differ substantially from these forecasts.

Country disclosures

Australia: Westpac holds an Australian Financial Services Licence (No. 233714). This material is provided to you solely for your own use and in your capacity as a client of Westpac.

For XYLO Foreign Exchange clients: This information is provided to you solely for your own use and is not to be distributed to any third parties. XYLO Foreign Exchange is a division of Westpac Banking Corporation ABN 33 007 457 141 and Australian credit licence 233714. Information is current as at date shown on the publication. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. XYLO Foreign Exchange's combined Financial Services Guide and Product Disclosure Statement can be obtained by calling XYLO Foreign Exchange on 1300 995 639, or by emailing customercare@ XYLO.com.au.

New Zealand: In New Zealand, Westpac Institutional Bank refers to the brand under which products and services are provided by either Westpac or Westpac New Zealand Limited ("WNZL"). Any product or service made available by WNZL does not represent an offer from Westpac or any of its subsidiaries (other than WNZL). Neither Westpac nor its other subsidiaries guarantee or otherwise support the performance of WNZL in respect of any such product. The current disclosure statements for the New Zealand branch of Westpac and WNZL can be obtained at the internet address www.westpac.co.nz. For further information please refer to the Product Disclosure Statement (available from your Relationship Manager) for any product for which a Product Disclosure Statement is required, or applicable customer agreement. Download the Westpac NZ QFE Group Financial Advisers Act 2008 Disclosure Statement at www.westpac.co.nz.

China, Hong Kong, Singapore and India: This material has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (as defined in the applicable Singapore laws and regulations) only. Recipients in Singapore of this material should contact Westpac Singapore Branch in respect of any matters arising from, or in connection with, this material. Westpac Singapore Branch holds a wholesale banking licence and is subject to supervision by the Monetary Authority of Singapore. Westpac Hong Kong Branch holds a banking license and is subject to supervision by the Hong Kong Monetary Authority. Westpac Hong Kong branch also holds a license issued by the Hong Kong Securities and Futures Commission (SFC) for Type 1 and Type 4 regulated activities. This material is intended only to "professional investors" as defined in the Securities and Futures Ordinance and any rules made under that Ordinance. Westpac Shanghai and Beijing Branches hold banking licenses and are subject to supervision by the China Banking and Insurance Regulatory Commission (CBIRC). Westpac Mumbai Branch holds a banking license from Reserve Bank of India (RBI) and subject to regulation and supervision by the RBI.

UK: The contents of this communication, which have been prepared by and are the sole responsibility of Westpac Banking Corporation London and Westpac Europe Limited. Westpac (a) has its principal place of business in the United Kingdom at Camomile Court, 23 Camomile Street, London EC3A 7LL, and is registered at Cardiff in the UK (as Branch No. BR00106), and (b) authorised and regulated by the Australian Prudential Regulation Authority in Australia. Westpac is authorised in the United Kingdom by the Prudential Regulation Authority. Westpac is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. Westpac Europe Limited is a company registered in England (number 05660023) and is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

This communication is being made only to and is directed at (a) persons who have professional experience in matters relating to investments who fall within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "Order") or (b) high net worth entities, and other persons to whom it may otherwise lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as "relevant persons"). Any person who is not a relevant person should not act or rely on this communication or any of its contents. The investments to which this communication relates are only available to and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such investments will be engaged in only with, relevant persons.

Disclaimer continued overleaf

Bulletin

3

DISCLAIMER

Disclaimer continued

Any person who is not a relevant person should not act or rely upon this communication or any of its contents. In the same way, the information contained in this communication is intended for "eligible counterparties" and "professional clients" as defined by the rules of the Financial Conduct Authority and is not intended for "retail clients". With this in mind, Westpac expressly prohibits you from passing on the information in this communication to any third party. In particular this communication and, in each case, any copies thereof may not be taken, transmitted or distributed, directly or indirectly into any restricted jurisdiction. This communication is made in compliance with the Market Abuse Regulation (Regulation(EU) 596/2014).

Investment Recommendations Disclosure

The material may contain investment recommendations, including information recommending an investment strategy. Reasonable steps have been taken to ensure that the material is presented in a clear, accurate and objective manner. Investment Recommendations for Financial Instruments covered by MAR are made in compliance with Article 20 MAR. Westpac does not apply MAR Investment Recommendation requirements to Spot Foreign Exchange which is out of scope for MAR.

Unless otherwise indicated, there are no planned updates to this Investment Recommendation at the time of publication. Westpac has no obligation to update, modify or amend this Investment Recommendation or to notify the recipients of this Investment Recommendation should any information, including opinion, forecast or estimate set out in this Investment Recommendation change or subsequently become inaccurate.

Westpac will from time to time dispose of and acquire financial instruments of companies covered in this Investment Recommendation as principal and act as a market maker or liquidity provider in such financial instruments.

Westpac does not have any proprietary positions in equity shares of issuers that are the subject of an investment recommendation.

Westpac may have provided investment banking services to the issuer in the course of the past 12 months.

Westpac does not permit any issuer to see or comment on any investment recommendation prior to its completion and distribution.

Individuals who produce investment recommendations are not permitted to undertake any transactions in any financial instruments or derivatives in relation to the issuers covered by the investment recommendations they produce.

Westpac has implemented policies and procedures, which are designed to ensure conflicts of interests are managed consistently and appropriately, and to treat clients fairly.

The following arrangements have been adopted for the avoidance and prevention of conflicts in interests associated with the provision of investment recommendations.

1. Chinese Wall/Cell arrangements;

1. physical separation of various Business/Support Units; III. Strict and well defined wall/cell crossing procedures; IV. a "need to know" policy;

V. documented and well defined procedures for dealing with conflicts of interest;

VI. reasonable steps by Compliance to ensure that the Chinese Wall/Cell arrangements remain effective and that such arrangements are adequately monitored.

U.S.: Westpac operates in the United States of America as a federally licensed branch, regulated by the Office of the Comptroller of the Currency. Westpac is also registered with the US Commodity Futures Trading Commission ("CFTC") as a Swap Dealer, but is neither registered as, or affiliated with, a Futures Commission Merchant registered with the US CFTC. Westpac Capital Markets, LLC ('WCM'), a wholly-owned subsidiary of Westpac, is a broker-dealer registered under the U.S. Securities Exchange Act of 1934 ('the Exchange Act') and member of the Financial Industry Regulatory Authority ('FINRA'). This communication is provided for distribution to U.S. institutional investors in reliance on the exemption from registration provided by Rule 15a-6 under the Exchange Act and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors in the United States. WCM is the U.S. distributor of this communication and accepts responsibility for the contents of this communication. All disclaimers set out with respect to Westpac apply equally to WCM. If you would like to speak to someone regarding any security mentioned herein, please contact WCM on [phone]. All disclaimers set out with respect to Westpac apply equally to WCM.

Investing in any non-U.S. securities or related financial instruments mentioned in this communication may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the SEC in the United States. Information on such non-U.S. securities or related financial instruments may be limited. Non-U.S. companies may not subject to audit and reporting standards and regulatory requirements comparable to those in effect in the United States. The value of any investment or income from any securities or related derivative instruments denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related derivative instruments.

The author of this communication is employed by Westpac and is not registered or qualified as a research analyst, representative, or associated person under the rules of FINRA, any other U.S. self-regulatory organisation, or the laws, rules or regulations of any State. Unless otherwise specifically stated, the views expressed herein are solely those of the author and may differ from the information, views or analysis expressed by Westpac and/or its affiliates.

Bulletin

4