Australian consumer sentiment bounces back

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The Westpac-MI consumer sentiment index has just been released, with confidence jumping 4.2% to 97.8 in October. The index measures the balance between optimists to pessimists, with a reading of 100 indicative of an equal number of both. While the index bounced strongly in October, pessimists still outnumber optimists, something that has been the case in 18 out of the past 20 surveys.

Breaking down the October report, four of the five survey subcomponents increased during the month. Measures on family finances, both looking back a year and for the year ahead, rose by 1.3% and 3.5% respectively, while expectations for economic conditions in the year ahead jumped by a whopping 20% to 91.8. The gauge on whether now was a good time to buy a major household item also bounced, rising 6.3% to 115.9. Economic expectations over the next five years was the exception to the rule, slumping 7.9% to 82.7.

Despite the increase, Westpac chief economist Bill Evans believes the bounce is slightly less than what he would have expected.

“This result is a little short of the increase we would had expected given the strong boost the government received in the polls following recent leadership and ministerial changes,” he said.

“The rise in the Index has failed to offset the loss we saw last month with the Index 1.6% below its August level and still below the key 100 level indicating pessimists still outnumber optimists. The Index has now been below 100 for 18 of the last 20 readings. Given that politics is probably the most significant factor in the result it is noteworthy that the Index is 11.6% below the level (110.6) it reached following the election of the Abbott Government in September 2013.”

As was the case with the alternate ANZ-Roy Morgan consumer confidence survey released on Tuesday, Evans cited recent gains for the Australian dollar and share market, along with a steady improvement in the labour market, as factors that also contributed to the improved sentiment reading.

The perceptions towards the state of the labour market were particularly impressive, with the surveys unemployment expectations index tumbling to the lowest level seen in nearly four years.

“The Westpac Melbourne Institute Index of Unemployment Expectations fell by 16.3% from 156.3 to 134.9. Because the Index measures respondents’ outlook for the unemployment rate, a fall indicates an improvement in expectations around the labour market,” said Evans.

“This Index is now at its lowest level since November 2011 indicating a very significant improvement in how respondents assess the labour market including job prospects for those out of work and job security for those in work. This comes after a recent business survey which also showed a significant boost in businesses’ hiring intentions.”

Accompanied by the strong lift in sentiment towards whether now was a good time to buy a major household item, it suggests that household consumption may receive a boost in the months ahead should the lift in sentiment towards the labour market be maintained.

If consumers are more confident on the state of the labour market, they’re likely to be more confident in opening their wallets.

However, perhaps mitigating the improved perception towards the labour market, sentiment towards the housing market continued to weaken.

“Confidence around housing remains weak,” said Evans.

“The ‘time to buy a dwelling’ index slipped from 101.7 to 101.3 (down by 0.4%) to be down by 11% over the year. This index peaked in September 2013 at 145.3 and is down over 30% from that peak.”

He also noted that the house price expectations fell by 3.9% to 124.2, extending its slide from December 2013 to 25%.

Given weakening expectations towards the outlook for house prices, it may diminish the “wealth effect” that Australian home owners enjoyed in recent years thanks to the uplift in home prices.

The RBA will be hoping that improved sentiment towards the outlook for the labour market will be able to offset diminished expectations towards the housing market in terms of future household spending.

While he retains the view that the RBA will leave interest rates unchanged this year and next, Evans notes that “changes in financial conditions will also warrant scrutiny in the period ahead”. This is likely in reference to Westpac’s decision to lift residential mortgage rates by 20 basis points earlier today, a quasi monetary policy tightening that has seen expectations for further rate cuts lift in the months ahead.

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