Australian consumer confidence in May 2016 has recorded the highest increase in nearly 6 years, which is good news for the economic outlook, the government as well as the Reserve Bank of Australia. The Westpac- Melbourne Institute Consumer Sentiment Index (Westpac-Mi) jumped by 8.5% to touch 103.2, the highest levels seen since January 2014 and in percentage terms, the jump was the highest since June 2010. According to the ANZ-Roy Morgan weekly indicator, sentiment grew by 3.2% last week to 116.8, the highest level since January 2014, which offset the 2.2% fall in the previous week. ANZ said that the boost in confidence was probably because of the surprisingly robust GDP report the previous week, which showed a growth of 1.1% and an annual growth of 3.1%, the most rapid for the past three years. It also said that the increase was broad based, with the gains being driven by consumers’ view of the economic outlook. With the index going over 100, the implication is that the number of optimists is greater than the number of pessimists for the first time since February.
Consumer Sentiment (Source: Reserve Bank of Australia)
ANZ further indicated that perceptions of the outlook for the economy have been boosted and the recovery in non-mining activity continues to gain momentum with the important drivers of growth being housing and consumer spending. Perceptions about economic conditions in the next year jumped 7% and in the next five years by 3.5%, while the indicator on consumer finances for the next 12 months jumped by 2.5% and compared to a year ago by 0.5%. The improvement in the perceptions of household finances suggests an optimistic outlook for consumer spending, along with an improvement in the housing market, which will further boost confidence.
The latest data specifically revealed a rise in all components – family finances compared to a year ago (up 3.2%), family finances over the next 12 months (up 7.2%), economic conditions over the next 12 months (up 13.2%), economic conditions over the next 5 years (up 14.8%) and the time to buy a major household (up 4.9%).
The credit for the improved sentiment may be attributed to the release of the federal budget. Other experts say that the boost in confidence is because of the decision of the Reserve Bank of Australia to have cut interest rates to an all-time record low of 1.75% in May. Sharp increases in sentiment because of interest-rate cuts are reasonably common though this depends on other events occurring at the same time, and whether the move was anticipated by the market. The impact of the interest-rate cut on sentiment has been further reinforced by a 50% rise in confidence levels among people with mortgages. However, Westpac has noted that the views of consumers about the budget were negative, suggesting that this may have negatively affected sentiments.
Unemployment Rate (Source: Reserve Bank of Australia)
Respondents to the Westpac survey suggest a lukewarm reaction to the budget, the outlook for the labour market and therefore consumer spending was more encouraging. There was a drop of 5.8% in the unemployment index, the lowest level since January 2012. This would suggest that consumers expected drop in unemployment in the period ahead. Despite the improvement in sentiment, it is possible that the Reserve Bank of Australia may not slash interest rates further in the second half of the year. Overall, the confidence index remains susceptible to changes given the developments in the domestic economic data along with other political developments to be witnessed in near future.
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