A clear-cut election result, a recent sharemarket rally and lower fuel prices have buoyed the sentiment of Australian investors, with the Westpac-Melbourne Institute Consumer Sentiment Index recovering about a third of the drop seen in April after US President Trump’s initial tariff announcement.
The May index, released Tuesday, showed consumer sentiment rose 2.2% to 92.1 from April’s score of 90.1, with manageable inflation rates contributing to consumers’ rising expectations of potential interest rate cuts.
“Recall that our April survey was in the field over the week that included the ‘reciprocal tariffs’ announced by US President Trump,” Matthew Hassan, Westpac’s head of Australian micro-forecasting, said in unveiling the latest index.
The previous reading showed markedly weaker consumer sentiment after the announcement, with an average index for April of 86.6.
“Against this benchmark, the May read of 90.1 is more like a 6% rebound,” Hassan added.
But he emphasised that the index remains in “firmly pessimistic” territory overall, hovering at 3.9% below March levels, with persistent cost-of-living pressures driving down sentiment.
Meanwhile, National Australia Bank (NAB) also released its Monthly Business Survey covering April, showing business confidence improved even as weaker profitability led to slightly eased business conditions, although confidence remained in negative territory below its long-run average.
Consumer sentiment ticks up as tariff shock ebbs
The May Consumer Sentiment Index showed rebounding sharemarkets, falling petrol prices and gains among older Australians – likely from superannuation-linked wealth effects – driving improved perceptions of household finances, according to CreditorWatch chief economist Ivan Colhoun. The report continues a more than three-year streak of scores below 100, reflecting more pessimists than optimists among those surveyed.
“Unemployment expectations improved, suggesting optimism about the labour market, though declines in SEEK job ads in February and March raise caution about the outlook,” Colhoun said, adding that expectations for interest rate cuts are growing.
Meanwhile, “global economic risks from tariffs have eased, with a probable 10% broad-based minimum tariff seen as manageable” compared with the proposition of higher tariffs that weighed on sentiment in April, he said.
Farhan Badami, a market analyst at eToro, added that “some post-election optimism” likely also contributed to the rebound. However, the “hot topics” of tariffs and cost of living are likely to keep sentiment well below neutral.
Badami believes the data support a widely expected rate cut at the Reserve Bank of Australia’s next meeting.
“With unemployment data due Thursday and the RBA set to decide on interest rates next week, today’s data offers policymakers a nuanced picture: cautious but not collapsing sentiment,” Badami said.
“It may give the RBA enough justification to cut rates next week while they monitor labour market dynamics in an environment of sticky inflation and global risks.”
Business conditions deteriorating
The NAB survey showed a reversal in the recent sharp rise in capacity utilisation, with that measure falling to 81.4%, returning to long-run average levels for the first time since mid-2021. The business conditions score fell to +2 in April, the lowest level since the first COVID-19 lockdown.
Purchase cost growth increased to 1.7% in quarterly equivalent terms from 1.4%, while labour cost growth remained steady. Final product price growth and retail price growth both picked up.
“Overall, both business conditions and confidence remain weak relative to average levels, highlighting the risk that the economy is struggling to maintain the pickup in momentum we saw in the last quarter of 2024,” NAB Chief Economist Sally Auld said.
The survey also highlighted reemerging inflationary pressures, with purchase and labour costs rising to levels that could threaten the Reserve Bank of Australia’s inflation target of 2.5%, according to Colhoun. He also pointed to mixed industry and state performance.
“Retail and manufacturing sectors remain weak, and conditions in finance, property and business services have also deteriorated,” he said, with Queensland and New South Wales seeing stronger business conditions while Victoria lags.
“At face value, today’s monthly NAB survey supports a further reduction in interest rates at next week’s RBA board meeting, with capacity utilisation and business conditions both declining in April and overall continuing to decline at a moderate pace from previous COVID highs,” Colhoun said.
“At the same time, however, purchase costs and retail prices both jumped to levels that would be inconsistent with at-target inflation in the medium term, if they were sustained in coming months.”