Consumer confidence takes knock

Consumer confidence has tumbled to its lowest level for five years in the Westpac McDermott Miller survey as pessimism about the economic outlook grows.

Westpac chief economist Brendan O'Donovan said the decline was the steepest since June 2000, the winter of discontent.

It mirrors falls in the monthly Colmar Brunton survey and in the National Bank's business confidence survey.

"It's another piece of evidence that the economy is rapidly losing momentum and further undermines the need for any additional tightening by the Reserve Bank," O'Donovan said.

He attributes the fall in consumer confidence to the lagged effects of higher interest rates and petrol prices.

"There's a realisation, too, that the higher dollar doesn't just make plasma TVs cheaper, it is also hurting exporters. And there has been wall-to-wall coverage of the [economic] slowdown in the media."

O'Donovan finds it ominous that consumers have become more cautious even before the housing market runs out of steam.

"It makes you gulp a bit to think what will happen when the housing market does finally stop."

The consumer confidence index fell to 110.1 from 120.2 in September, the lowest level for five years.

The index reflects the responses to five questions. The only one to improve was whether respondents were better off than a year ago. A net 11.7 per cent say they are, up 6.5 per cent from September.

"This is hardly surprising given the robust wage growth seen in recent quarters, a record low unemployment rate and ongoing house price inflation of about 15 per cent per annum," O'Donovan said.

"But the remainder of the survey suggests consumers believe this is as good as it gets."

A net 11.2 per cent expect to be better off in a year's time, down 5.2 per cent from September and the lowest level for this indicator since 2000.

A net 15.1 per cent expect the economy to worsen over the next 12 months and while a net 25.2 per cent expect good times over the next five years, that is the lowest reading for that indicator since 2001.

Consumers have become less willing to buy big-ticket items. Only a net 17.7 per cent think it is a good time to do that, less than half the level in September.

O'Donovan said responses to that question were generally quite stable from one survey to the next, so when a large movement occurred it was strong evidence that a substantial change in planned consumption was in the offing.

"Given the linkage made by the Reserve Bank from house prices to consumer spending and domestic demand, the drop in confidence and sharp fall in the willingness to spend on major appliances suggest house prices have become much less supportive of demand," he said.

"When the housing market does stop, the economy will be in for a very tough transition period."

Promises of increased Government spending had clearly not been enough to hold up sentiment.

The decline was spread across all regions, ranging from a 3.3 per cent fall in the Bay of Plenty to 20.3 per cent drop in Nelson, Marlborough and the West Coast. Auckland's index reading fell from 118.9 in September to 110.6.