Australian economic confidence plummeted last week

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Australian consumer confidence continued to fall last week, weighed down by further losses on the stock market and ongoing concerns towards the outlook for China’s economy.

The ANZ-Roy Morgan consumer confidence index slid 0.8% to 113.2, following a 1.9% decline registered in the prior corresponding week.

Concerns surrounding Australia’s economic outlook, along with perceptions on whether now was a good time to buy a major household item, were entirely responsible for the modest weekly decline.

Sentiment towards the economic outlook over the year ahead fell for a fourth consecutive week, sliding 7.5% to the lowest level since the appointment of Malcolm Turnbull as Australia’s Prime Minister.

According to the ANZ, this suggests that the “Turnbull effect” on sentiment may be waning.

Like the view for the economy in the year ahead, perceptions towards the five-year outlook also deteriorated, falling 4.6%. It too sits at the lows last seen in early October.

Completing the trio of weaker readings, the subindex on whether now was a good time to buy a major household item skidded 4.6%.

While economic sentiment was significantly weaker, this was almost entirely offset by perceptions towards family finances.

Compared to a year earlier, sentiment leapt by 8.6%, overshadowing an equally impressive, and surprising, 4.8% lift in sentiment towards finances in the year ahead.

It’s a remarkable outcome given the financial damage caused by the recent sell-off in Australian stocks, something that has seen the benchmark ASX 200 index lose over 8% since the beginning of the year.

According to Felicity Emmett, co-head of Australian economics at ANZ, the question now is whether financial market volatility will become entrenched, hindering sentiment in the future.

Consumer confidence fell a modest 0.8% last week, leaving levels just a tick (0.4%) above their long run average. This follows a dip in the previous week which was likely driven by news flow on global financial market volatility and concerns over China’s economic growth. While this week’s fall in confidence may be impacted by ongoing global concerns and share market weakness, subsequent readings will be crucial in assessing whether these concerns have a short-lived impact or reflect a more persistent shift in consumer confidence. The impact of financial market instability is a reminder that global shocks provide ever-present risks for a small open economy like Australia.

On a more positive note, conditions in the labour market are expected to remain strong in the near term and will be a positive factor for consumer confidence and the Australian economy in the short term. Over the 12-18 month outlook however, challenges from a shaky global backdrop and a softening housing moment will weigh on economic growth and consumer confidence.

As Emmett suggests, recent strength in the labour market is likely to underpin confidence levels, at least in the short-term.

However, given the likelihood that financial market volatility will likely persist in 2016 – albeit at lower levels – and the prospect for softer housing market conditions domestically, whether stronger labour market conditions will be enough to keep confidence at-or-above average levels remains uncertain.

Given the need for household consumption to remain robust during Australia’s economic transition, any deterioration in sentiment may act as a precursor to future weakness in household spending, hindering economic growth.

ANZ, like financial markets, predict that the RBA will need to cut interest rates further in the year ahead. They forecast that the RBA will cut the cash rate twice, first in May and again in August.

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