Westpac Banking : MI Consumer Sentiment January (PDF 76KB)

BULLETIN

19 January 2022

Consumer Sentiment remarkably resilient in January

The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 2.0% to 102.2 in January from 104.3 in December.

This is a surprisingly solid result given the rapid spread of the omicron COVID variant over the last month. The 2% decline compares to the 5.2% drop seen in the first month of the delta outbreak in NSW, a 6.1% drop heading into Victoria's 'second wave' outbreak in 2020 and the epic 17.7% collapse when the pandemic first hit in early 2020.

Note that the headline Index and its components are all seasonally adjusted to remove a regular holiday-related January lift - the 2% decline in the headline index essentially means this regular lift failed to materialise in 2022. State and sub-group measures are not seasonally adjusted.

While the January sentiment result was resilient overall, responses over the course of the survey week - from January 10 to January 14 - did show a deterioration suggesting some increased anxiety as the week progressed.

The state breakdown provides some clues to the resilience of sentiment overall. Whereas confidence increased in NSW (1.7%) and Victoria (4.1%), it posted significant falls in Queensland (-2.7%), Western Australia (-5.1%) and South Australia (-3.9%). Consumers in states impacted by 'delta' lockdowns appear to have been less unsettled by the rapid spread of the omicron variant than those in states experiencing their first major wave of COVID infections.

The component detail shows increased concerns about the outlook for both the economy and family finances. These were partially offset by a strong improvement in actual family finances and a slightly more positive attitude towards major purchases.

Consumers' near-term expectations for the economy showed the biggest fall.

he 'economic conditions, next 12 months' sub-index dropped 9.6% from 104.9 in December to 94.8 in January, a swing from cautious optimism to cautious pessimism. Medium- term expectations for the economy were also pared back but remained optimistic overall, the 'economic conditions, next five years' sub-index falling 6.1% to 103.6.

Consumers reported a significant improvement in their finances relative to a year ago This sub-index lifted by 7.5% to 95.6, a nine-month high. That likely reflects a combination of improving incomes - particularly as labour markets rebound - wealth gains from a resurgent housing market and the accumulation of significant 'reserves' due to very high savings rates during lockdowns over the last two years. The latter, estimated to be worth around $250bn, may now be providing consumers with comfort given the return of virus disruptions. These savings will also be important when the omicron threat eases, providing the basis for a strong rebound in spending.

Consumer Sentiment Index

130	index				index	130
120						120
110						110
100						100
90						90
80						80
70	Sources: Westpac Economics, Melbourne Institute			70
Jan-06	Jan-10	Jan-14	Jan-18	Jan-22

The survey detail gives some evidence that consumers remain inclined to spend despite the omicron surge with the 'time to buy a major household item' sub-index rising 2.8% to 108.9 in January. However, this sub-index has still shown a larger decline on a year ago basis, down 8.3%, than the headline sentiment Index, which fell by 4.5%.

Consumers are unsettled about the outlook for their finances. The 'finances, next 12 months' sub-index fell 2.8% to 108.1.

That nervousness would be consistent with the sharp deterioration in the economic outlook but may also reflect shifting expectations for interest rates. We are now asking consumers about their interest rate expectations every month given the sensitivity and uncertainty around the rate outlook.

In January, 55% of respondents, an outright majority, expected mortgage interest rates to rise over the next 12 months. That compares with 41% when we last ran the question in August and 36% when we ran the question about a year ago in February 2021. This is the highest proportion expecting interest rate rises since February 2018, when, of course, those expected rate increases failed to materialise.

While interest rates look to be more of a concern, confidence amongst respondents with a mortgage has held up well. Sentiment across this sub-group is only down 1.8% over the year and lifted by 2.3% in the January survey.

Growing expectations of interest rate rises may also be starting to impact consumer assessments of the housing market outlook.

Consumers are becoming less bullish on the outlook for house prices. The Westpac Melbourne Institute House Price Expectations Index fell 4.8% to 143.4 in January, its lowest level

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

19 January 2022

since November 2020. That said, most Australians still expect prices to rise over the next year rather than fall. Expectations deteriorated in all the major eastern states - down 2.3% in NSW, 10.8% in Victoria and 8.5% in Queensland - but posted a solid 12.6% gain in Western Australia.

Interestingly, consumers that own investment properties reported a significantly larger 12% decline in price expectations and are considerably more downbeat than owner occupiers.

Homebuyer sentiment improved in the month. The 'time to buy a dwelling' index lifted 6.3% but is still down 34% from its November 2020 peak, the latest month only partially reversing a 10.2% decline in December.

This measure is particularly sensitive to shifts in affordability. The January gain may be an early sign that an actual and expected moderation in house prices is starting to see buyer sentiment stabilise. However, any stabilisation is likely to be at relatively low levels, particularly given growing consumer expectations of a rise in mortgage interest rates.

The Westpac Melbourne Institute Unemployment Expectations Index increased by 8.2% to 112.7, marking a significant deterioration (recall that lower reads mean more consumers expect the unemployment rate to fall over the next 12 months). Despite the rise, the index remains well below the long run average of 130 implying that consumers still have significantly better than average expectations for the labour market.

The Reserve Bank Board next meets on February 1. The Governor has indicated that the future of the bond purchase program will be considered at the meeting. He has identified three criteria for the decision: 1) the actions of other central banks; 2) the functioning of the government bond market; and 3) progress towards achieving the Board's inflation and

Consumer Sentiment - January 2022

employment objectives. If that expected progress is in line with the Bank's November forecasts, the purchase pace is likely to be scaled back from $4 billion to $2 billion per week. Improved forecasts would see the curtailment of the program altogether.

The decision by the FOMC to accelerate its tapering and some reports that the Bank's actions in the bond market are constraining liquidity support the case for a full wind down.

Developments around omicron in January point to a scaling back in consumer spending in the month of January and a likely downward revision to the Bank's near-term growth forecasts. But this may not be sufficient to indicate 'no net progress' on the employment and inflation front. That will also depend on the employment and inflation reports due this week and next.

Despite evidence in recent speeches that the Governor appears to favour a full wind down Westpac retained its long- held view that it would still choose to scale back rather than fully wind down. That was in response to the sudden emergence of the omicron variant.

The data flow over the next week will determine whether progress on the employment and inflation objectives has been sufficiently encouraging to allow that full wind down and Westpac will review its current forecast.

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

Item	avg*	Jan 2020	Jan 2021	Dec 2022	Jan 2022	%mth	%yr
Consumer Sentiment Index	101.4	93.4	107.0	104.3	102.2	-2.0	-4.5
Family finances vs a year ago	89.3	82.0	89.3	89.0	95.6	7.5	7.1
Family finances next 12mths	107.5	99.0	108.6	111.2	108.1	-2.8	-0.4
Economic conditions next 12mths	91.1	84.8	102.7	104.9	94.8	-9.6	-7.7
Economic conditions next 5yrs	91.9	87.9	115.6	110.4	103.6	-6.1	-10.4
Time to buy a major household item	126.5	113.4	118.8	105.9	108.9	2.8	-8.3
Time to buy a dwelling	118.5	118.8	124.5	81.9	87.0	6.3	-30.1
Unemployment Expectations Index	129.7	134.0	119.0	104.1	112.7	8.2	-5.3
House Price Expectations Index	124.8	151.5	145.2	150.6	143.4	-4.8	-1.3

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 10 January to 13 January 2022. 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 2022 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