Australians are suddenly confident again about their finances and the economy

Australia Day on Bondi Beach. Photo: Brendon Thorne/ Getty Images.

Australian consumer confidence, as measured by the ANZ-Roy Morgan survey, jumped to a more than four-year high in the first week of 2018.

However, with most Australians off enjoying their holidays, there was always a question as to whether or not the sharp improvement was truly driven by improved confidence levels or just temporary, one-off factors.

Indeed, as ANZ pointed out last week when the first report of 2018 was issued, confidence levels do tend to lift in the immediate aftermath of the Christmas-New Year period.

And as many of you already know, Australia is not exactly a bad place to be during summer, right?

Well, we now know the answer as to what drove the improvement: no, it was not just because you were all on holidays, but because you’re truly feeling more confident about your finances and the current state of the economy.

According to last week’s survey, confidence levels rose strongly again.

The headline ANZ-Roy Morgan Consumer Confidence index increased 1.2% to 123.5 points, leaving it at the the highest level since October 2013.

“The rise in confidence is quite encouraging and is consistent with the positive data out on building approvals and retail sales,” said David Plank, Head of Australian Economics at ANZ Bank.

“Last week, we noted a positive seasonal bias to the first reading of the year. There is no clear seasonal bias in the second week, suggesting that the improvement in confidence this year may be more than just an empty resolution.”

As seen in the chart below from ANZ, the index now sits well above its long-run average of 112.9.

Source: ANZ

According to Plank, the improvement last week reflected improved sentiment towards current financial and economic conditions, along with the outlook for household spending.

“The current finances sub-index rose 2.0% following a solid 5.8% rise the week prior,” he said, adding that “sentiment around current economic conditions rose 1.4%, bringing the index to its highest value since March 2013.”

That helped to offset small declines in sentiment towards finances in the year ahead and the economy looking five years ahead which dipped by 0.2% and 0.5% respectively, partially reversing strong gains reported in the previous week.

Along with the increase in the current finances subindex which has a reasonable relationship to changes in household spending levels, the final component in the survey — whether now was a good time to buy a household item — also offered hope on the outlook for consumption, rising by 3.4%, well above its historic average.

While a promising sign for the household sector and, as a consequence, the broader Australian economy, Plank says that upcoming wage data from the ABS will likely determine whether the recent improvement will be sustained longer-term.

“In our view, persistently low wage growth has acted to constrain rising confidence for some time<' he says. "As such we see the February wage data as vital to how consumer confidence plays out over the coming months. "In the near term, the employment numbers, out later this week, may also have an impact.” The ABS will release Australia's December jobs report on Thursday, January 18. Following one month later, the ABS will also release Australia's December quarter wage price index on February 21.

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