Confidence among mortgaged households has dropped to the weakest reading in records stretching back to 1994, according to the latest Westpac consumer sentiment survey. The fall comes as the RBA governor warns the year ahead will feel like a recession because of cost-of-living pressures and weak growth.

Sentiment at four-year low

The broader consumer sentiment index sank again in November, reaching a four-year low. Matthew Hassan, Westpac's head of economic forecasting, said household mood was last this bad in 2022, when inflation was running close to 8% after the RBA lifted borrowing costs by 4 percentage points in a year.

According to Hassan, readings this weak have previously appeared only at rare points:

• •the onset of the Covid pandemic
• •the height of the global financial crisis
• •the recessions of the early 1990s and early 1980s

Rate expectations and the oil retreat

After five rate increases this year, nearly three in four respondents said they expected another rate hike within 12 months. ANZ data, however, showed the implied probability of an RBA rate cut at more than 50% by August next year, with a cut to 4.6% fully priced in by December 2027.

Investors have been rethinking their forecasts for central bank moves alongside a rapid retreat in the global oil price. Brent crude plunged 20% to below US$94 a barrel after testing a post-Iran war high of nearly US$118 at the end of October. Hassan's base case is that "rates do start to come down from August next year", with no further hikes.

Government under cost-of-living pressure

Prime Minister Anthony Albanese played down tensions with treasurer Jim Chalmers as Labor faces pressure over cost-of-living issues. "The treasurer is doing a great job", Albanese said, pointing to "a couple of budget surpluses, lower deficits" and economic reform.

A day earlier, frontbencher Murray Watt had called on colleagues to stop undermining Chalmers. Albanese said he was working closely with the treasurer ahead of next month's mid-year budget update, which will include cuts to government spending as pressure mounts to contain inflation.

Helplessness compared to 2020

Confidence in the economic outlook over the coming year was at its weakest since August 2020, matching a pandemic-era low. Hassan said there is "a similar feeling of helplessness now", citing factors such as rising fuel prices that are out of people's control. He compared the current mood to August 2020, when Melbourne entered its second lockdown just before government income support was massively scaled up.

The next step named in the report is the mid-year budget update next month, with spending cuts to contain inflation, while Hassan's base case has rates starting to fall from August next year.