Australians are losing confidence on where the economy is heading

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Australians are more downbeat on the outlook for the economy than what they’ve been for nearly two years.

That view likely reflects news last week that the Australian economy grew in the March 2017 quarter at the slowest annual pace since the global financial crisis.

According to the latest ANZ-Roy Morgan consumer confidence report, the subindex measuring economic conditions looking five years ahead dropped 2.6% to 100.6, the lowest level since September 2015.

Source: ANZ

The news was worse for the outlook for the economy in the year ahead, with that subindex cratering 5.2%, completely unwinding gains achieved in the previous three weeks.

David Plank, head of Australian economics at ANZ, put the weakness in both readings down to Australia’s “disappointing” March quarter GDP report.

“Not surprisingly, the lift in confidence stalled last week following the weak Q1 GDP result,” he said.

However, somewhat surprisingly, while sentiment towards the economic outlook took a big hit, the exact opposite was seen in the survey’s measures on household finances.

They absolutely soared.

“Household views around current financial conditions jumped 9.4% bringing the index to its highest level in 14 weeks,” said Plank. “Views towards future conditions also improved, rising 1.5% last week following a 2.7% rise the previous week.”

Despite those enormous gains, the final subindex in the survey — whether now was a good time to buy a major household item — fell by 2.5%, giving back some of the gains seen in the previous four weeks.

Quite a divergence in opinions towards the economy and household finances if there ever was one.

Perhaps some optimism that economic weakness may prompt the RBA to cut rates again — something that has helped to boost readings on finances in the past — may have played a role, despite no shift whatsoever in financial market pricing.

But that’s speculation. Plank says the boost in views towards finances is a promising sign, particularly on the outlook for household consumption, the largest part of the Australian economy.

“This is encouraging in terms of the outlook for household consumption, we expect that persistent weakness in wage growth and high levels of household debt will continue to weigh on spending,” he said.

While an interesting short-term divergence, as this next chart shows, using a four-week moving average — a better overall guide to the trend in sentiment levels — views towards the economy and finances still remain well below their historic averages.

Source: ANZ

With sentiment towards finances soaring, while those towards the economy tanked, it left the headline consumer confidence index unchanged at 112.9, in line with its historic average.

Given the importance of labour market conditions on the health of household finances, one suspects that this week’s Australian jobs report for May, released on Thursday, will prove influential on whether the gains seen last week can be sustained.

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