Australians are getting edgy about where the economy is heading

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While it’s had next to no impact on financial markets yet Standard and Poor’s decision to place Australia’s sovereign credit rating on watch negative — paving the way for a potential ratings downgrade within the next two years — has resonated with Australian consumers, and not in a good way.

The latest ANZ-Roy Morgan consumer confidence index slid by 0.5% to 115.2 last week, the third consecutive decline in a row, with concerns over the economic outlook almost entirely responsible for the fall.

“The decline in confidence was driven by a more pessimistic economic outlook,” said ANZ. “Households’ views of the 12 month economic outlook dipped 4.1%, while views towards the economic outlook in the next 5 years declined 2.7%.”

Perhaps reflective of the pessimism over the economy, the subindex on whether now was a good time to buy a major household item also declined, falling 1.3%.

Helping to offset those concerns, perceptions about family finances rose, perhaps boosted by the prospect of a further monetary policy easing, not just in Australia but in other major nations.

“Consumers’ views of their current finances edged 0.3% higher, while views towards future finances increased a sharp 4.3%, largely reversing the fall over the previous week,” noted ANZ.

Felicity Emmett, head of Australian economics at ANZ, suggested the decline was largely due to the S&P move on Australia’s credit rating along with ongoing political uncertainty in Canberra.

“The fall in consumer confidence of close to 3% over the past three weeks partly reverses the lift seen through May and early June, back when confidence reached a 2.5 year high,” said Emmett.

“Confidence has been buffeted by uncertainty surrounding the domestic political outlook, as well as concerns over global growth. The downgrade of Australia’s credit rating outlook by S&P is also likely to have weighed on consumer sentiment.”

While overall confidence levels still remains above its long-run average, Emmett casts doubt on whether this trend can continue, suggesting that upcoming Australia unemployment data will be crucial in determining sentiment levels in the near-term.

“Household sentiment remains well above its long-term average, although how sustainable this is remains to be seen. That said, the fact that a hung parliament looks to have been narrowly avoided is encouraging,” she says.

“More importantly, though, will be the performance of the labour market. In this regard, we keenly await Thursday’s employment numbers.”

On Thursday the Australian Bureau of Statistics will release its June labor force report. According to a survey conducted by Bloomberg, economists are looking for an increase in employment of 10,000. With participation tipped to remain steady at 64.8%, the unemployment rate expected to tick up to 5.8% from 5.7% seen in May.

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