Australians haven't been this optimistic in years

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Australians haven’t been as confident as they are right now in years.

The latest Westpac-MI consumer sentiment index for December jumped 3.6% to 103.3, leaving it at the highest level in four years.

A reading of 100 is deemed neutral, meaning that the number of optimists and pessimists are the same. Anything above this figure indicates that optimists are in the majority.

Source: Westpac

“This is a surprisingly strong result and confirms the lift we have seen in the Index over the last three months,” said Bill Evans, Chief Economist at Westpac.

“The average reading for the Index in the December quarter is 5% above the average for the September quarter when we saw a disturbing slump in consumer spending.

“This result is supportive of the view that consumer confidence may have bottomed out during that September quarter.”

Evans put the impressive rebound down to diminished concern towards the outlook for interest rate.

“A less threatening outlook for interest rates appears to have boosted confidence,” he said.

“During that September quarter households were spooked by media and many commentators saying that interest rates were likely to start rising in the new year. That effect has now calmed down significantly.”

Speculation that the federal government may introduce personal income tax cuts, the passing of same-sex marriage legislation, a reduction in geopolitical concerns surrounding North Korea and ongoing strength in Australia’s labour market were other factors that Evans said could explain the bounce.

“With the labour market remaining strong respondents are generally more confident about the domestic economy and there is likely to have been a ‘feelgood effect’ from the passing of marriage equality legislation,” he said.

“Media coverage of tax cuts in the US combined with easing tensions in North Korea, may also be supporting an improved outlook for international conditions.”

Indeed, when asked about news recollection during the survey period, Evans said the highest recall rates among respondents were for news on ‘economic conditions’ (19%), ‘budget and taxation’ (19%), interest rates (19%), inflation (10%), jobs (10%) and international conditions (9%).

“News on all of these topics was viewed as more favourable than three months ago, with particularly big improvements around international conditions, the economy and interest rates,” said Evans.

Perhaps of more importance than the bounce in sentiment, Evans said it could be a sign that the deceleration in household spending may also be about to reverse.

“In turn, growth in consumer spending is likely to have also bottomed out in the September quarter,” he said, referring to the weak household consumption figure in Australia’s September quarter GDP report which was the weakest result since the global financial crisis.

However, Evans was quick to point out that even if spending levels do pickup, the increase is only likely to me moderate.

“With ongoing weak income growth, a low savings rate and high debt levels we cannot be confident that consumers have the capacity to sharply lift spending despite higher confidence,” he said.

Turning to the detail of the report, all five components improved in December, led by sharp improvements in sentiment towards current family finances and economic conditions over the next 12 months.

Source: Westpac

“Responses on family finances support the assessment around interest rates and tax cuts although it is unlikely that respondents are experiencing any relief in terms of wage increases,” Evans said.

“The ‘finances vs a year ago’ sub-index posted the biggest gain, rising 5.6% to 89.6 — an 18 month high but still well below the 100 mark indicating more consumers are seeing their finances deteriorate than improve.”

Optimism towards the economic outlook was also a feature with sentiment improving noticeably looking both over the short and long-term.

Helping to explain the lift in sentiment towards family finances and the economy, the Unemployment Expectations Index within the survey fell 2.4% to 127.6, the lowest level since May 2011.

A lower reading reflects more people expect unemployment to fall over the next 12 months.

And with less concern over interest rates, improved sentiment towards labour market conditions and a slowdown in the housing market, sentiment towards the housing market also improved, especially in Western Australia and Queensland.

“The ‘time to buy a dwelling’ index rose 2.3% to 100.6, the first reading over 100 since the start of the year,” Evans said.

Underpinning that result, expectations for house prices also edged lower with another steep drop in Sydney offsetting improved outlooks in most other states.

“Price expectations continue show a sharp slide in New South Wales where the state index fell a further 12% in December to be down by 24% over the year,” said Evans. “In contrast the Victoria index was up 2% for the month and 10% for the year, with Queensland and Western Australia posting strong gains in the month.”

Despite the improvement in sentiment levels, from a broader investment perspective, respondents still indicated a reluctance to invest in riskier areas with their savings.

“Nearly two thirds of consumers still favour safe options — deposits, superannuation or paying down debt — with only 12.8% nominating real estate and 8% nominating shares,” said Evans.

As for the implications from the December report, while a welcome surprise, Evans says it’s unlikely to see the Reserve Bank of Australia contemplate a near-term interest rate hike.

“We doubt whether this welcome lift to confidence will be sufficient to see the Bank achieve its ambitious growth forecast in 2018 of 3.25%,” he says, again citing constraints around incomes, savings and debt as factors that will likely keep consumer spending growth below trend.

“We confirm our view that the cash rate is likely to remain on hold at 1.5% through 2018”.

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