Chinese concerns spread from Wall Street to Main Street

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Australian consumer sentiment fell heavily last week, demonstrating that concerns over China’s economy are now impacting on confidence levels outside of financial markets.

The weekly ANZ-Roy Morgan consumer confidence index skidded 1.9% to 114.1 last week, driven in part by concerns surrounding China’s economic growth prospects and volatility on global financial markets.

Despite the sentiment slide, the index remains above its long-run average of 112.7.

With Australia’s benchmark stock index – the ASX 200 – falling 5.76% last week, perceptions towards current family finances were hammered, sliding 9.9%, the largest weekly decline seen since March 2012.

The weakness in current finances was replicated in expectations for the year ahead, albeit by a smaller margin, with the forward-looking subindex sliding 5.8%.

While perceptions towards family finances were slapped lower, those towards the economic outlook were mixed.

The survey’s subindex on economic conditions in next 12 months fell by a modest 0.3%. Helping to offset that weakness, perceptions towards the five years ahead rose by an impressive 2.6%.

After the carnage on financial markets seen last week, things can only get better, right?

Elsewhere the subindex on whether now was a good time to buy a major household item slid by 0.3%, although, providing some perspective, it remains near highs not seen since June last year.

Warren Hogan, chief economist at ANZ, put the weakness in sentiment down to one single factor – financial market volatility sparked by China.

Last week’s financial market volatility made headlines everywhere, and appears to have impacted the confidence of Australian consumers. The large losses on local and overseas share markets has hit consumers’ perception of their personal finances, with this sub-index falling almost 10% in just one week. That said, overall consumer confidence remains above its long run average and well above the levels seen for much of the last two years. The recent volatility will need to persist and heighten concerns about the health of the world economy for this to translate into a meaningful drop in confidence that could impact consumption and investment.

Indeed, despite current concerns, conditions in the domestic economy are robust. This week’s ANZ job ads suggest the demand for workers was rising at the end of 2015. We expect the unemployment rate to hold below 6% in the coming months. A healthy labour market should be a positive factor for consumer confidence in the months ahead, although we see headwinds building later in 2016.

As Hogan notes, the weakness in sentiment may prove temporary should financial markets find their footing in the sessions ahead. In terms of the underlying driver of confidence, domestic economic factors, especially the performance of the labour market, will likely determine how sentiment levels fluctuate in the period ahead.

Job security, and the ability to choose alternate employment, will almost certainly bolster confidence and help to underpin household spending should labour market conditions continue to improve.

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