Australian consumer sentiment is at its highest level in over 4 years

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If there was any doubt remaining that Australians are feeling more confident about themselves, it has surely been put to bed by the latest Westpac-Melbourne Institute consumer sentiment report released today.

Confidence levels jumped again.

The headline Consumer Sentiment Index rose 1.8% to 105.1, hitting the highest level since December 2013.

A reading of 100 is deemed neutral, meaning the number of optimists and pessimists are equal. A reading above 100, as was seen in January, means there were more optimists than pessimists in the latest survey.

Source: Westpac

“Sentiment has continued to recover from the weakness seen in the September quarter last year, bolstered by a less threatening outlook for interest rates and improving confidence around the economy and jobs,” said Matthew Hassan, Senior Economist at Westpac.

“While the mood is ‘cautiously optimistic’ rather than buoyant, this is the best monthly index read since late 2013 and the most positive start to a calendar year since 2010.”

And helping to drive that improvement, Westpac said sentiment towards the economic outlook soared in the latest survey.

The subindex measuring sentiment looking one year ahead rose by 2.6%, overshadowed by a massive 5.4% increase in sentiment looking five years ahead.

“Both subindexes are now comfortably above their long run averages,” said Hassan.

Source: Westpac

Helping to explain why Australians are feeling more confident about the economy, sentiment towards labour market conditions also improved sharply in January.

“The Unemployment Expectations Index declined 3.8% to 122.8,” Hassan said, noting that a lower reading means more consumers expect unemployment to fall in the year ahead.

“The index, which can be viewed as a measure of consumers’ sense of job security, is now comfortably below its long run average of 130 and at a 6.5 year low.”

It’s little wonder Australians are feeling a little more confident about themselves.

Along with improving labour market conditions, Hassan said that sentiment in households with a mortgage rose strongly during the month, something that he says is “a sure sign that interest rate expectations played a supporting role”.

Source: Westpac

However, while the outlook for the economy brightened noticeably, it did not translate to a large improvement towards views on family finances.

Current finances actually deteriorated, falling 1.1%, giving back some of the substantial gains achieved in the December survey. Looking forward, sentiment towards expected finances did improve, lifting 1.7% to 109.1, the highest level in four years.

The final component within the survey — whether now was a good time to buy a major household item — rose 0.5% to 122.8. Despite the modest improvement, it still remains below its long-run average.

Outside of the main survey components, sentiment towards the housing market — always an area of hot topic among Australians — came in mixed in the latest survey.

The ‘time to buy a dwelling’ index rose 6.1% to 106.7, the highest level since September last year. Perhaps contributing to that improvement, the separate ‘house price expectations’ index dipped 4.4% to 129.1, leaving it sitting around its long-run average.

“The biggest declines in January were in Victoria and Queensland but New South Wales consumers continue to have the most subdued price outlook after sharp falls in previous months,” Hassan says.

More broadly, Hassan says the latest survey points to a clear improvement in the consumer mood, noting that the average reading over the last three months is 6.3% above the average seen between July to September, a period when household spending was incredibly weak.

On top of booming retail sales and new car sales data in recent months, Hassan says that it points to some recovery in spending following a “disturbing slump” in the third quarter.

However, while a promising sign, he says that constrained household budgets means that any recovery — should one occur — will be modest in scale.

“The degree to which spending improves still looks likely to be constrained with the survey detail suggesting family finances are still under pressure, limited scope for further reductions in saving to support spending, and high debt levels an ongoing concern for many households,” he says.

As such, Hassan isn’t expecting the Reserve Bank of Australia to touch interest rates at all this year.

“Westpac continues to expect that the board is likely to hold rates steady throughout 2018,” he says.

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