Income tax cuts have propelled Australian consumer confidence to the highest level in years

Stefan Postles/Getty ImagesTreasurer Scott Morrison
  • Australian consumer sentiment jumped to the highest level in over four years in July, propelled by stronger confidence levels towards the economic outlook.
  • Income tax cuts passed by the Federal government could explain the large increase seen in the latest survey.
  • Making the headline improvement all the more impressive, it came despite some steep falls in sentiment towards the outlook for home prices, especially in New South Wales and Victoria.

Australian consumer confidence jumped to the highest level in over four years in July, spurred on by income tax cuts delivered by the Federal government.

Westpac’s consumer sentiment index, produced in conjunction with the Melbourne Institute, rose 3.9% to 106.1 in the latest survey, leaving it at the highest level since late 2013.

“The consumer mood showed a clear improvement in July,” said Matthew Hassanm Senior Economist at Westpac.

“The latest reading is the most positive result since November 2013 with the index 8% above the average in 2014 to 2017.

“This is the eighth month in which the index has been above 100, indicating optimists outnumber pessimists, a clear turnaround on the previous year in which 11 out of 12 readings were below 100.”

Westpac Bank

Hassan said it was improved optimism towards the outlook for the Australian economy, rather than the state of current or expected family finances, that drove the increase in July.

“The survey detail shows the latest lift in sentiment is being driven by growing optimism about the economy,” he said.

“The ‘economic outlook over the next five years’ subindex surged to be up nearly 20% on a year ago.

“The ‘economic outlook over the next 12 months’ subindex also posted a solid 3.9% rise to be up 13.5% from a year earlier.”

Hassan notes that both readings are now well above their long run averages, and in stark contrast to sentiment levels towards the economy seen in previous years.

Westpac Bank

Sentiment towards family finances rose by a smaller amount, in comparison, with current finances compared to a year ago lifting 2.3% while those looking 12 months ahead increased by 2.1%.

“Both remain a touch below long run average reads,” Hassan said.

“Household budgets have come under persistent pressure from a range of factors, including slow growth in wages, rising electricity and petrol costs, and declining house prices.”

While other factors such as Australian stocks at decade highs and a recent decline in Australian unemployment may have contributed to the increase, Hassan says income tax cuts delivered by the Federal government was a major factor behind the improvement, especially among middle-income households.

“Some of this lift likely reflects developments around tax policy with the Government’s multi-year tax cut package passing into legislation in June and the first round of relief coming into effect on July 1,” he said.

“Sentiment among the ‘middle income’ households that benefit most from initial changes showed a particularly strong rise in July with a 12.3% gain across those with annual incomes in the $60-80,000 range.”

Mirroring the improvement seen in sentiment towards the economy and family finances, respondents also indicated a greater willingness to up their spending levels.

“The ‘time to buy a major household item’ subindex rose 1.7% in July to be up 3% over the last three months,” Hassan said.

“At 124.5, the sub-index is near the top of the range seen over the last two years.”

Despite the increase, Hassan said the subindex still remains 3 percentage points below its long-run average, and well below the levels that would indicate “buoyant spending conditions”.

Making the headline increase all the more impressive, it came despite continued subdued views towards the outlook for unemployment and the housing market.

The unemployment expectations index dipped 0.8% to 125.8, indicating that fewer Australians believe unemployment will rise over the next year, but that was only enough to partially reverse the 5.7% increase seen in June.

“The index, which can be viewed as a measure of consumers’ sense of job security, looks to have stalled after posting a significant improvement over the second half of 2017 and the first few months of 2018,” Hassan said.

Sentiment towards the housing market, especially prices, also softened noticeably, mirroring so many other housing indicators seen in recent months.

“The ‘time to buy a dwelling’ index declined 2.5%, unwinding just over half of last month’s gain,” Hassan said.

“At 103.1, the index is positive – indicating that more Australian’s say it is a good time to buy rather than bad — but well below the long run average read of 120.”

Sentiment towards house prices tumbled even more, dropping 6.2%, leaving it at the lowest level in over two years.

“The ‘house price expectations’ subindex slid to 112.5, a new low since early 2016,” Hassan said, adding that “over half of all consumers expect prices to be unchanged or lower over the next year”.

He said the weakness was driven by responses in New South Wales and Victoria, falling 9.7% and 13% respectively, in line with recent price data from the likes of CoreLogic.

While an understandable response to what’s been seen and read in those states, the fact that broader sentiment across the country managed to improve so much in the latest survey suggests that a declining wealth effect has yet to dent confidence among households.

Given housing is the largest store of wealth for the vast majority of households, whether that remains the case is uncertain, especially should prices in Australia’s largest markets continue to weaken.

As such, Hassan is not getting carried away with the result just yet.

“Despite the positive run, the overall level of sentiment is still not that strong – at 106.1, the July reading compares favourably to recent years but is still below the 108.3 average recorded over the ten years prior to the GFC, and peaks well above the 110 mark,” he says.

The improvement in sentiment also coincides with stronger growth in Australian retail sales over the past two months, and will be welcomed by the Reserve Bank of Australia (RBA) who describe the outlook for household consumption as an “ongoing area of uncertainty”.

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