Australian consumer confidence just posted its largest increase in nearly 6 years

Photo: Vince Caligiuri/ Getty Images.

In what is a good sign for the government, Reserve Bank of Australia and the broader outlook for the Australian economy, consumer sentiment rocketed higher in May, recording its largest increase in nearly six years.

The Westpac-Mi consumer sentiment index surged by 8.5% to 103.2, leaving confidence levels at the highest level seen since January 2014.

In percentage terms, the increase was also the largest since June 2010.

With the index above 100, it signals the number of optimists now outnumber pessimists, the first time this has occurred since February.

As you would expect with the boost in the overall index, all five of the survey’s components improved during the month led by an enormous 14.8% increase in sentiment towards the outlook for the economy in the five years ahead.

Elsewhere, confidence in the one-year economic outlook, along with readings on family finances and whether now was a good time to buy a major household item, also recorded solid increases.

The table below, supplied by Westpac, reveals the internal movements in the survey for May.

While the government will be rejoicing that sentiment improved following the release of the federal budget, something that has now always occurred in the past, Bill Evans, chief economist at Westpac, put the surge in confidence down to the Reserve Bank of Australia’s decision to cut interest rates to a record-low level of 1.75% in May.

“Our analysis indicates that the dominant driver of the boost to confidence has been the rate cut,” said Evans following the release of the May report.

“Sharp increases in the Index in response to rate cuts are fairly common, although they depend somewhat on other events at the time and whether moves were expected. The last four rate cuts have seen the Index rise on average 6.6%, with gains ranging from 3.5% to 8.5%.”

Further demonstrating the impact of the rate cut on sentiment, Evans notes that confidence levels among those with a mortgage surged by 15%, a result he described as “stunning”.

While sentiment levels roared higher on the back of the rate cut, Westpac notes that consumers’ views towards the budget were negative, indicating that it likely dragged on sentiment levels in the survey.

Westpac asked survey respondents “What impact do you expect the Federal Budget to have on your family finances over the next 12 months?”, with the the response largely negative at -22.4%. This compared with -22.5% in 2015 and -56.1% in 2014.

“Since we started asking this question in 2010 all net responses have been negative and the 2016 response is the second highest over that period,” said Evans. “But this result is hardly the sort of glowing response that would explain an 8.5% jump in the sentiment index.”

Although the reaction to the budget was tepid, there was better news on the outlook for the labour market — and potentially household spending given the relationship between the two — with the survey’s unemployment index dropping 5.8% to the lowest level seen since January 2012.

A lower reading indicates that consumers expect unemployment to fall in the period ahead.

“If sustained, this fall in the index will be consistent with our expected steady improvement in labour market conditions,” noted Evans.

Despite the enormous lift in sentiment recorded in May, Evans, like others, believes that the Reserve Bank of Australia is still likely to cut interest rates further in the second half of the year.

“The Reserve Bank board next meets on June 7. We expect the Board to keep rates on hold at that meeting although we are expecting a further rate cut at the August meeting,” he said.

“It seems likely that it will have to deliver that cut in August after it has had time to further analyse the inflation trends in the June quarter and the March quarter national accounts.”

Given the uplift to confidence seen in May, one can only imagine what an additional rate cut will do to confidence levels should other factors, particularly around the federal election, provide no angst for households in the months ahead.

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