As Australia grapples with a mining sector downturn, economists warn that a new headwind threatens to hit business sentiment: waning consumer confidence.
"There are early signs that the transition away from mining investment is slowly occurring…but some new downside risks have emerged," Felicity Emmett, senior economist at ANZ wrote in a report.
"Most worrying has been the sharp fall in consumer confidence over recent weeks which appears to be related to the 2014-15 Commonwealth Budget savings measures which largely targeted households," she said.
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Consumer confidence slumped after the government last month delivered its harshest budget in nearly two decades, slashing welfare spending and hiking taxes for high-income earners to rein in the ballooning budget deficit.
The Westpac - Melbourne Institute Index of Consumer Sentiment dropped to 92.9 in May – the lowest reading since August 2011 – before edging up to 93.2 in June. A reading below 100 indicates pessimism on the state of the economy.
The trajectory of consumer spending is key to the recovery in the non-mining sector and an important watch-point, economists say.
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"If the weakness in consumer confidence persists in coming months and spills into weaker business confidence or conditions, two things could happen. One, household spending growth could wane and two, non-mining firms' spare capacity could expand and the modest improvement in investment intentions could be prematurely stunted," Emmett said.