Late yesterday department store David Jones shocked investors by announcing its second-half profits could slide by as much as 12%. Today Myer followed suit, reconfirming profit downgrades up to 5% lower than last year’s takings.

The announcements come amid the release of the latest Westpac-Melbourne Institute survey, which shows consumer confidence falling to recessionary levels. Crikey spoke to Westpac chief economist Bill Evans for clarification.

What’s driving the fall in consumer sentiment?

There’s a whole range of reasons for the fall. Some of the biggest are anxieties about the carbon tax, concerns about global financial instability, and the aftermath of aggressive interest rate rises. Consumers are also seeing gradual reductions in house prices, so their major source of income is falling.

There have also been concerns about the European financial crisis, the barrage of bad news about the US economy, and the situation in Japan.

Why is the retail sector being hit particularly hard?

Consumers are the customers. They are the ones that are doing the buying, so if they are tightening their wallets, retailers will quickly feel the consequences.

What other industries will be affected?

The impact of low consumer sentiment on other areas of the economy is both direct and indirect. When consumers slow their spending there will be a spillover into the housing market, people will start spending less on things like transport, and we will also see people spending less on recreational outings in things like restaurants.

How are consumer sentiment surveys conducted?

People are asked a series of five questions: 1) Their assessment of their current family finances; 2) Their assessment of their finances over the coming 12 months; 3) Their outlook of the economic conditions in Australia over the next 12 months; 4) Their outlook of the Australian economic conditions over the next five years; 5) Whether it is considered a good or bad time to buy a major household item.

How accurate are these surveys?

Measuring consumer confidence is not like measuring an election result, you can’t determine the figures that accurately, but in terms of spending there is a broad relation between consumer confidence polls and consumer behaviour. These figures are the lead indicator.

What can we expect of consumer confidence in the near future?

The thing about this result is that a big fall in consumer confidence is usually associated with a knee-jerk reaction to a big event. This wasn’t the case this time; there wasn’t any major event and that is the disturbing thing. Usually you’ll get some recovery from a knee-jerk reaction.

However, we may see some recovery in the figures after initial reactions to the carbon tax details, but I can’t be certain. The problem is that the biggest fall in confidence came from high-income areas, and they are not getting much compensation from the tax.