CONSUMER SENTIMENT
- Consumer confidence lifted for the fifth straight month in October. The index of consumer sentiment rose by 2.1 points to 121.4 in October, marking the highest level in more than two years (since June 2007).
- The 32 per cent lift in confidence over the past five months has been the strongest since the survey began in 1973.
What does it all mean?
- The interest rate hike in early October has hardly been able to dent how chipper consumers are feeling. Rather it seems the rate hike has been taken as confirmation that the Australian economy has survived the global financial crisis and the economic recovery is well underway. Consumer sentiment recorded the fifth consecutive increase and is now holding at the best levels in over two years.
- No doubt the continuous barrage of positive economic news in recent times has allowed consumers to feel more optimistic about life. Importantly the better than expected employment data released last week would have added to the optimistic result in the latest survey. The concerns over job security are fast diminishing, and confirmation by the Reserve Bank that the "emergency" is now over is being celebrated by consumers.
- The ending of the global financial crisis has meant that consumers can once again focus on their finances. Government grants, tax cuts, rising house prices and the gains in the share market have ensured that household balance sheets are in good shape. While the biggest weekly expenditure for the households, petrol prices, continues to slide. In fact households are saving almost $45 a month on their average fuel bill when compared with a year ago.
- Given the scale of the global financial crisis, what is remarkable is that consumer sentiment is just 5 per cent away from the all-time high set in early 2005. And the fact that consumer sentiment lifted for the fifth consecutive month despite significant talk about further rate hikes is quite notable.
- Aussie consumers are more confident however the expected rate hikes is likely to dampen some of that enthusiasm in coming months. CommSec expects the Reserve Bank to raise the cash rate from the current rate of 3.25 per cent to 5 per cent by the end of 2010.
What do the figures show?
- The index of consumer sentiment rose by 2.1 points or 1.8 per cent to 121.4 in October. The sentiment index is at the highest levels in more than two years (since June 2007). The confidence index has soared 32.6 per cent over the past five months – the biggest gain for an equivalent period since the index started in 1973.
- The current conditions index rose by 2.7 per cent, while the expectations index rose by 1.1 per cent.
- Four of the five components of the index rose in October.
- The estimate of family finances compared with a year ago rose by 4.2 per cent; The estimate of family finances over the next year lifted 0.5 per cent; Economic conditions over the next 12 months rose by 5.7 per cent; The measure of economic conditions over the next 5 years fell by 2.6 per cent; and The measure on whether it was a good time to buy a major household item rose by 1.6 per cent.
What is the Importance of the Economic Data?
- Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: "The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since." Confident consumers may be more inclined to spend, especially on major items.
What are the implications for interest rates and investors?
- Consumers are confident and their finances are in good shape. The bottom line is that consumers will keep spending in coming months, boosting prospects for retailers.
- The latest data adds to the likelihood of near term rate hikes. The Reserve Bank has confirmed that the domestic economic can stand on its own two feet and as the economic recovery gains traction, stimulus will be removed.
- CommSec expects the cash rate to rise to 5 per cent by the end of 2010.
Source Savanth Sebastian, Economist, CommSec