Australia | Sep 09 2009
By Chris Shaw
In what Westpac Banking Corporation chief economist Bill Evans called an extraordinary result the Westpac-Melbourne Institute Consumer Sentiment Index rose 5.2% in September, putting it at a reading of 119.3 against the 113.4 result for August.
The new reading means the Index is at its highest level since July of 2007, having gained 34.4% over the past four months on the back of a relief rally for consumers as the Australian economy has managed to avoid slipping into a recession. Driving the gain have been expectations, as Evans notes over the past four months those components of the index that capture expectations have increased by almost 50%, while those measuring current conditions have risen by just 14.4% over the same period.
The results lead Evans to express some caution as to how much the improvement in sentiment will translate into actual increases in spending, as on only four occasions has the Index been higher – January-April 1984, March-July 1994, January-February 2005 and May-July 2007, with each of these occasions coinciding with strong consumer spending levels. But as Evans notes these precedents also coincided with periods when current conditions sentiment levels were at much stronger levels of more than 120 on the Index, which compares to a current reading of 109.5.
Ovr the last six months he notes consumer spending has only grown at around 2.5% in annual terms, with the bank currently expecting this measure to flatten out before a pick up to 3% growth in 2010. In Evans’s view if consumer confidence levels can be maintained through next year, the risk to consumer spending expectations is to the upside.
Responses to the survey show good news on the economy is having a greater impact than any concerns with respect to rate rises, Evans noting around 70% of respondents see current conditions as favourable, up from about 35% in June. Even among those with a mortgage confidence is improving, having risen 4.4%.
This is significant in Evans’s view as he notes in the last rate hike cycle confidence levels were steady until the variable interest rate hit 7.0%, a level from which confidence fell by around 9% whenever rates were subsequently increased. With current mortgage rates at around 5.8% Evans suggests it will not be until rates get up to 6.0-6.5% before some households are deterred.
Evans also notes the overall expectations Index is at its highest ever level even though the components measuring current conditions are well below previous peaks. As examples he notes “economic conditions over the next 12 months” rose 9.8%, “economic conditions over the next 5 years” increased by 6.7% and “family finances compared to a year ago” was up 8.3%.
In Evans’s view the case for a rate hike when the Reserve Bank of Australia (RBA) meets next month has been stengthened by today’s confidence data, but there remain additional economic numbers of importance to be released in coming days that will give the RBA a better picture of the current state of the economy.
Westpac’s current forecasts suggest a slowing in momentum, which if it plays out in the data in coming days is likely to see the RBA defer any decision on rates for at least another month. If the data come in stronger than expected however, Evans sees the way clear for the RBA to lift the cash rate next month.