By BRIAN FALLOW
WELLINGTON - Consumer confidence has recorded its steepest fall, raising questions about the sustainability of the present economic expansion.
The drop in the WestpacTrust-McDermott Miller quarterly survey in June was especially dramatic in Auckland. In March, optimists outnumbered pessimists by nearly 20 per cent in Auckland - now there are more pessimists.
Nationally, the confidence index is still in positive territory, though only just. The index reflects consumers' answers to five questions about the economic outlook and their own prospects.
WestpacTrust economist Michael Jansen said the latest decline was driven by a sharp drop in expectations about the environment over the next 12 months, with a majority now expecting bad economic times.
Of those expecting bad times, the largest number, 37 per cent, cited Government economic policies, though interest rates and the well-publicised fall in business confidence also drew some blame.
But Mr Jansen said: "A significant proportion of those who think there are good economic times ahead attributed that to Government economic policy as well."
In Auckland, he said, the state of the housing market was a key reason for the drop in confidence, with a lot of respondents citing interest rates.
"If you look at interest rates less house price inflation as an indicator of affordability, that has probably never been as bad as it is at the moment, with mortgage rates around 9 per cent while house prices are flat."
The outlook for retailers was not flash, he said.
"Some of them are worried about the weak New Zealand dollar coming through into higher prices, so that they get the double whammy of margin pressure and a fall-off in demand."
Given that consumer spending represented 60 to 65 per cent of the economy, such a sharp fall in confidence was a shot across the bows, raising questions about the sustainability of the economic expansion, he said.
"Implicit in the Reserve Bank's [May] forecasts was this seamless transition from low-interest-driven growth to an export-led period of growth. It is not really as seamless as one would like."
Despite concerns about the general short-term economic outlook, households remained cautiously optimistic about their own financial situation in a year. A net 11 per cent expected to be better off financially in 12 months.
"This suggests that, similar to recent business confidence surveys, the fall in consumer confidence is not entirely reflective of economic fundamentals, with consumers possibly placing undue weight on the impact of Government policy decisions."
Rural confidence also fell.
"Confidence in these regions had been expected to maintain some strength, given improved prospects for exports, strong world demand and rising commodity prices."
Gloom clouds likely to swamp expansion
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