Optimism returns to Australia as confidence in the economy grows

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Now here’s something that hasn’t been heard for a while.

There are currently more optimists than pessimists in Australia, something that hasn’t been seen in a year.

The latest Westpac-MI consumer sentiment index rose 3.6% to 101.4 in October, leaving it at the highest level since October 2016.

Source: Westpac

A reading of 100 is deemed neutral, meaning that the number of optimists and pessimists are the same. Any reading above 100, as seen in October, indicates that there are more of the former.

Despite a slim margin, it’s the first time there has been more optimists than pessimists since November 2016.

According to Bill Evans, Chief Economist at Westpac, the improved mood was driven by optimism towards the economy in the year ahead, something he says fits with improving economic conditions globally.

“The ‘economic conditions, next 12 months’ subindex posted the strongest gain, rising 7.1% to a four year high,” he said following the release of the October report.

“Some of this likely stems from consistent coverage of the continuing improvement in the global economy with, in particular, improved confidence in the US growth outlook.

“Longer-term economic expectations also rose with the subindex measuring the ‘economic outlook over the next five years’ lifting by a smaller 1.4%.”

And with economic conditions expected to strengthen in the period ahead, respondents also think their financial position will improve.

“The sub-index tracking expectations for ‘finances over the next 12 months’ posted a solid 4.2% gain,” says Evans.

“An easing in concerns about potential interest rate rises was a likely factor.”

Respondents were less optimistic about their current financial situation with that subindex rising by a smaller 1%.

Source: Westpac

Evans said that stronger perceptions towards labour market conditions likely explain the rebound in both measures.

“[The] unemployment expectations index fell 3.3% to 129.2 in October, marking the lowest reading since June 2011,” Evans said. “The move is broadly based with expectations improving across all the major states.”

A lower reading indicates that an increasing number of respondents expect unemployment to fall in the year ahead, something that has undoubtedly been helped by a surge in predominantly full-time employment over the past six months.

Optimism towards the labour market helped to offset continued weakness in the survey’s housing measures.

“Consumer views around housing remained downbeat,” said Evans.

“The ‘time to buy a dwelling’ index dipped 0.2% to 95.1, well below the long run average of 120. State indexes continue to vary widely, ranging from very weak reads in New South Wales (77) and Victoria (88) to a strongly positive result in Western Australia (135.4).”

Mirroring that result, the survey’s measure on house prices also weakened, dropping 1% to 140.5.

While slightly weaker, that figure still indicates that respondents expect prices to increase in the period ahead.

“The index still shows positive price expectations nationally although the state breakdown showed a sharp 8% decline in New South Wales to the lowest level since June last year, partially offset by stronger price expectations in Queensland and Western Australia,” Evans said.

With expectations for the economy and family finances both picking up, respondents indicated that they intend to lift their spending levels, a welcome development for retailers following two months of falling sales.

However, while the subindex on whether now was a “good time to buy a major household item” rose 3.5% following a 2.1% gain in September, Evans says that it still remains below its long-run average and the levels of a year earlier.

“Suggesting that the sluggish spending evident through most of 2017 is likely to extend into year-end,” he said.

While a pleasant surprise after a year where pessimism dominated, Evans says that concerns about family finances remain acute.

“Respondents remain concerned about their own finances despite an expectation that the economy over all will improve,” he says.

“As we saw in the data for retail sales in August, consumer assessments of family finances, which have been downbeat for some time, are likely to be a more reliable indicator of actual spending than their views on the general economic outlook.”

Despite the bounce registered in both finance subindices in October, both readings still remain below the levels of a year ago, especially when it comes to current finances, underlining the point that Evans is making.

Until a strong and sustained lift in expectations is seen, Evans thinks that interest rates will remain unchanged well into 2019.

“Westpac does not expect rates to rise at all over the next year despite market pricing and general commentary,” he says.

This table from Westpac has more granular detail on the change in sentiment seen during the past month and year.

Source: Westpac

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