Australian optimism is back

Photo: Getty Images.

Sentiment among Australian households rebounded strongly in February with the Westpac-MI consumer sentiment index rising 4.2% to 101.3.

The increase, bucking turbulence that has rattled financial markets in recent weeks, was the largest in percentage terms since August 2015.

It also left the index at the equal highest level since January 2014.

A reading of 100 indicates that the number of pessimists is equal to the number of optimists, so on this occasion optimists outnumbered pessimists.

That’s only been seen five times in the past two years in this survey.

According to Westpac, four of the surveys five subindices improved during the month with the gains largely concentrated in sentiment towards family finances, reversing the deterioration seen in January.

Compared to a year ago, perceptions towards family finances rose by 11.3% while those for the year ahead increased by a smaller 3.8%.

Expectations for the economy came in mixed. The subindex measuring sentiment for the year ahead fell by 0.6%, largely offset by a 4.0% increase in perceptions looking five years ahead.

The gauge measuring whether now was a good time to buy a major household item rose by 3.1%.

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

Bill Evans, chief economist at Westpac, suggests that relative stability in Australia’s stock market – something that contributed to the decline registered in January – played a role in the bounce-back seen in February.

“Last month we interpreted the 3.5% fall in the Index as being mainly due to respondents’ concerns with the sharp falls in share markets and the oil price from the beginning of the year,” said Evans. “Between the beginning of the year and the final day of the January survey Australia’s share price Index fell by around 8% and the oil price was down by 20%.”

“Over the four weeks to the end of this February survey there has been little net movement in either share markets or the oil price although we have continued to see significant volatility. Respondents were clearly relieved that markets did not follow on from the steep declines we saw in early January.”

Casting doubt on whether the stock market related bounce in sentiment will continue heading into March, Evans cautioned that since the February survey was conducted, both the ASX 200 and crude oil price have fallen by 3% and 8% respectively.

Curiously, the bounce in sentiment came despite weakness in the surveys measures on unemployment expectations and the housing market.

The surveys unemployment expectations index increased by a further 1.9%, leaving the index some 7.7% above its recent low in October 2015. A higher reading indicates that survey respondents are more pessimistic on the outlook for the labour market.

After ripping higher in January, the surveys measures on whether now is a good time to buy a dwelling and house prices both deteriorated sharply.

The “time to buy a dwelling” index fell 12% after increasing by 14% in January, leaving it 21% below the level of a year earlier. The separate house price expectations index, after rising 20.5% previously, also recoiled, falling by 12.5%.

Ignoring the monthly volatility, sentiment towards the housing market appears to be weakening, fitting with other housing-related data released in recent months.

While an encouraging result for February, Evans notes that levels of uncertainty are particularly high at present.

“Today’s report highlights that one of the Bank’s most significant concerns of whether international developments will weigh on domestic demand will need more time to resolve,” says Evans. “Certainly the resilience of consumer sentiment, and in particular, respondents’ assessments of their own financial position are not pointing to a significant deterioration in domestic demand.”

“The other key issue for the Bank is whether recent momentum in the labour market can be sustained. In that regard today’s report provides a less encouraging insight with the Westpac Melbourne Institute Index of Unemployment Expectations printing a disappointing result.”

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