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Australian confidence is bouncing

Photo by Will Russell/AFL Media/Getty Images

Australian consumer confidence continued to improve last week, mirroring the rebound on global financial markets.

The ANZ-Roy Morgan consumer confidence index rose by a further 0.6% to 114.3, leaving the index above its long-run average of 112.7.

The index has now risen 2.8% over the past three weeks, partially retracing the 4.5% plunge seen in January.

Coincidentally, the movements in index mirror those seen in Australian stocks over the same time period. Australia’s benchmark ASX 200 index fell by 11.1% from December 31 through to February 10. From the low struck that day, the index has since rallied by 6.3%.

Over the week sentiment towards family finances and the economic outlook both improved, helping to offset a surprise fall in the subindex measuring whether now is a good time to buy a major household item. It declined by 4.0%, ensuring the headline increase was far smaller than what it would have been otherwise.

The internal movements of the surveys components are found below.

  • Financial situation compared to a year ago 110.0 (+2.1%)
  • Financial situation next year 128.6 (+2.0%)
  • Economic conditions next year 94.5 (+1.3%)
  • Economic conditions next five years 109.4 (+2.2%)
  • Time to buy a major household item 128.8 (-4.0%)

Warren Hogan, chief economist at ANZ, puts the improvement in sentiment down to the recovery in financial markets. Beyond short-term market volatility, he believes that recent debate on taxation reform, along with the performance of Australia’s labour market, will likely determine how sentiment levels hold up in the period ahead.

Confidence is starting to show an upward trend as financial market volatility wanes. With equity markets off their lows, consumers have turned their focus to domestic factors, notably the recent pick-up in auction clearance rates and solid conditions in the labour market.

Looking ahead, developments in the policy debate, in particular around tax, are likely to influence consumer sentiment. Discussions around tax reform and spending cuts are likely to intensify ahead of the May Commonwealth Budget and could weigh on sentiment in the coming months.

In addition, the impetus from the strength in the labour market may dissipate if employment growth slows around the middle of the year as we expect. This will be important for the outlook for monetary policy with the RBA looking for consumption growth to return to above trend later this year.

Recent economic data on Australia’s labour market, including the ANZ monthly job ads survey, suggests that the rapid pace of hiring seen in 2015 is likely to cool in the months ahead. Should that eventuate at a time when wages are growing at-or-close to record lows, it will cast doubt on whether households will be in a position to boost spending over the year ahead.

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