Australians remain pessimistic and that’s not a good sign for spending or the broader economy

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Pessimists outnumbered optimists in Australia for an eighth consecutive month in July, according to the latest Westpac-MI consumer sentiment report released today.

And according to Bill Evans, chief economist at Westpac, that doesn’t bode well on the outlook for household spending, the engine room of the Australian economy.

The headline confidence index rose fractionally during the month, increasing 0.4% to 96.6.

While a small improvement, it still indicates that there are more pessimists that optimists in Australia right now, continuing the trend seen since late last year.

From a year earlier the index fell 2.5%.

Source: Westpac

Over the month, improved readings towards current family finances, economic conditions over the next year and whether now was a good time to buy a major household item were largely offset by a sharp deterioration in sentiment towards the outlook for finances, which tumbled 4.2%. Respondents were also more downbeat on the longer-term outlook for the economy.

Evans said that out-of-cycle mortgage rate increases following regulatory changes introduced by Australia’s banking regulator, APRA, along with heightened speculation that the RBA may be considering hiking official interest rates, likely drove the decline in sentiment towards finances in the year ahead.

Kate Hickie, Australia and New Zealand economist at Capital Economics, said that recent increases in energy costs may have also been a factor.

“It is possible that this was partly driven by the energy price hikes that occurred at the start of July, which will feed through to higher household utility bills in the coming months,” she said.

Source: Westpac

The weakness in the survey’s finance measures over the past year, seen in the table above, do not paint an optimistic picture on the outlook for spending levels, says Evans.

“While-ever respondents remain concerned about their own finances prospects for a marked lift in spending patterns will remain remote,” he said.

At 8%, the drop in the longer-term economic outlook was the largest of any category over the past year. This too could explain the concern being expressed about household finances at present.

While concerns about the economy and finances remained entrenched, confidence towards Australia’s housing and labour markets also improved.

“Conditions in the housing market appear to be stabilising, at least for the time being,” said Evans.

The survey’s ‘time to buy a dwelling’ index rose by 3.1% from May, the largest increase seen for this year.

Evans said much of the improvement was driven by younger respondents following increased state government assistance to first-home buyers.

“Recent increases in state government assistance for first home buyers appears to have been a big factor in the July rise with the subindex for 25–34 year olds surging 36% in the month.”

Mirroring the bounce in whether now was a good time buy, expectations for house prices also surged, rising 8.6% after falling 11.8% over the prior two months.

Following a string of robust data in recent months, respondents were also more optimistic towards labour market conditions with the survey’s unemployment expectations index falling 3.1%.

A lower reading indicates that less people see unemployment levels rising.