Here's The Chart That Shows Why Falling Oil Prices Should Boost Australian Consumer Confidence

Prices in the bad old days. Getty/Mark Dadswell

There was some disappointment this morning that the recent 20% fall in petrol prices has not translated to a lift in Australian consumer confidence.

But it’s not a question of if the fall in petrol will lift consumer confidence, but when petrol prices will lift confidence, according to a new report from HSBC. The bank’s chief economist Paul Bloxham says the tumbling price of oil “should support Australia’s rebalancing act” – the lift in the non-mining sectors of the economy, including consumer spending, needed to maintain growth as mining activity falls.

Bloxham makes the point that while Australia is a net energy exporter, we import our petroleum needs. He says:

At this stage, our assessment is that the recent fall in oil prices on Australia is likely to be positive. It should support consumer spending, business profits and the rebalancing from mining to non-mining led growth. This could be partly offset by an indirect negative impact, if coal and gas prices were to fall sharply; however, so far, this has not occurred.

He also highlighted that lower petrol prices will drive Australia’s CPI lower and that, “lower inflation should provide the RBA with greater scope to maintain its current ‘very’ low cash rate setting, or, potentially consider cutting rates.” (Even though that is not the HSBC base case.)

But it is consumers, households and consumption where the biggest benefits are likely to be seen.

For consumers, lower petrol prices are a clear positive. Given that the average Australian household uses around 40 litres of fuel a week, a -21% fall in the petrol rice, therefore, saves consumers around AUD12 a week (or AUD624 a year), which is around 0.6% of household disposable income. As petrol is a larger proportion of overall expenditure for lower income households and these households tend to have a higher marginal propensity to consume out of income, the boost from lower petrol prices should be expected to have a noticeable positive impact on consumer spending. Historical comparisons show that falling petrol prices are typically positive for consumer sentiment.

He has this chart which shows the historical correlation between higher confidence and lower oil prices. If the correlation holds, then consumer confidence could rise as much as 25%!

If Bloxham is right and if employment also continues to grow across 2015 there could be a positive surprise for Australian confidence and consumption.

That would be very welcome economic news.

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