Australian consumer confidence is at a new high for 2016

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Australian household confidence continued to rise last week, fuelled by cheaper petrol prices and continued gains in Australian stocks.

The latest ANZ-Roy Morgan consumer confidence index rose by a further 1.4% last week, adding to the 3.1% surge seen in the previous corresponding week. At 116.4, the index is now well above the series long-run average of 112.7, and leaves the index back at the highest level seen this year.

According to the ANZ, the increase was largely driven by perceived improvements in household finances.

Perceptions towards personal finance in the year ahead surged by 5.4%, leaving the subindex at highs not seen since October 2009. The gauge measuring current finances compared to a year earlier also bounced, rising 3.8%. Perhaps as a result of the improvement in finances, the subindex measuring whether now was a good time to buy a major household item rose by 0.5%.

Despite the optimism surrounding personal finances, that failed to reflect in sentiment towards the economic outlook. The subindex measuring expectations in the year ahead fell 0.4%, outpaced by a 3.1% drop in sentiment looking five years ahead.

Felicity Emmett, head of Australian economics at the ANZ, suggests the concerns surrounding financial market turmoil seen at the start of the year has unwound.

Confidence has retraced the falls associated with financial market volatility in January and is now sitting at above-average levels. This week’s reading is the second highest seen since January 2014, reflecting a more upbeat view of consumers’ personal financial situation, as well as improving confidence about the economic outlook.

There is a mix of factors that may be playing a part in lifting confidence recently: the stronger Australian dollar is seen as a good thing for households wanting to travel overseas, equity markets have retraced most of their earlier losses, and petrol prices have been falling sharply since the beginning of the year.

Solid labour market conditions are also likely to have played a key role in lifting confidence. This week’s labour market report will be important in assessing whether the recent strength has persisted. Further inroads into the unemployment rate will be crucial for confidence and spending.

While the recent rebound in confidence has been fuelled by temporary factors, as was the case with the decline seen in the early parts of 2016, Emmett is spot on when she suggests that “further inroads into the unemployment rate will be crucial for confidence and spending”.

Recent labour market indicators have been weakening, suggesting that strong labour market hiring seen in the second half of 2015 will likely slow in the months ahead.

Given the importance job security, wage growth and the ability to switch or find employment has on the outlook for household spending, any substantial deterioration will cast doubt on whether the strength in household consumption, hence economic growth, will be maintained in 2016.

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