Australians aren't concerned about the upcoming budget, and that presents a risk

Photo by Brendon Thorne/Getty Images

Pessimists continue to outnumber optimists in Australia, although the gap between the two remains small.

The Westpac-MI Australian consumer confidence index slipped 0.7% to 99.0 in April, leaving it marginally below the 100 level which indicates that the number of optimists and pessimists are equal.

It’s now been that way for five consecutive months.

Despite the continued weakness, Bill Evans, chief economist at Westpac, called the result “surprising but welcome”, noting that the news flow on the Australian economy and housing market had been fairly downbeat since the last survey was conducted.

“Since the last survey there has been intense media attention on housing highlighting concerns around affordability and potential price bubbles. Banks have also increased interest rates for some mortgage borrowers,” he says.

“Reports on the labour market have been disappointing. The unemployment rate was reported to have lifted back to just below 6%.

“Arguably these factors could have been expected to produce a marked fall in confidence, particularly around the economic outlook.”

While that did occur, particularly looking one year ahead, as seen in the table below from Westpac, it was largely offset by improved confidence around family finances which soared, particularly the reading on current finances compared to a year earlier.

Source: Westpac

Evans suggests that may be due to a lack of concern surrounding the upcoming federal budget, at least compared to recent years.

“Speculation around the upcoming Commonwealth Budget has been benign,” he said. “Accordingly, respondents are more confident about their finances.”

While a good sign for the government, given the lack of concern currently being expressed and the impact past budgets have had on confidence levels, Evans warns that “any significant negative shocks in the budget can be expected to render considerable damage to confidence”.

Evans also noted that confidence was supported by a rebound in Western Australia, most likely due to the change in government following the state election. Firmer commodity prices was also a supportive factor, both in Western Australia and Queensland.

While these could be deemed to be one-off factors, particularly the state election, the boost in sentiment towards family finances was fairly remarkable given concerns about the housing and labour market both increased.

On the housing market, warnings from the RBA over increased financial stability risks and moves from APRA, Australia’s banking regulator, to limit the level of interest-only mortgages being written, sentiment understandably fell in the April survey.

“The ‘time to buy a dwelling’ index fell by 3.3% to 96.3. This read is 6.2% below the average over the last 12 months and 20% below the peak levels seen in early 2015,” said Evans.

He said that largely reflected falls in Sydney and Melbourne which were partially offset by solid gains in Brisbane and Perth.

“Clearly affordability factors were behind this divergent response,” Evans said.

The measure on house price expectations also eased 1.1%, an outcome that possibly reflected the regulatory change from APRA.

Like sentiment towards the housing market, views towards the labour market also weakened.

“Confidence around the labour market deteriorated somewhat in April…with the unemployment expectations index increasing 1.8% to 140.3,” said Evans.

A higher reading indicates that more survey respondents expect unemployment to increase in the year ahead.

Given that view, it was fairly remarkable that sentiment towards finances not only held up well, but soared.

Perhaps news of higher house prices and the Australian stock market rising to a multi-year high were contributing factors, helping to offset continued weakness in perceptions towards the labour market.

As has been the case for some time now, Evans believes that the result reinforces the view that the RBA will leave the cash rate on hold for a considerable period of time.

“As discussed previously, the RBA is concerned about excessive household leverage which has been boosted by rising house prices,” he says.

“While this concern might be alleviated by a rate hike the real economy is in no shape to deal with higher rates.

“Considerable spare capacity persists in a stagnant labour market, inflation remains below the bank’s target zone and is expected to remain at the bottom of the zone, and incomes and confidence are restraining consumption.”

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.