Consumer confidence surges, business expectations improve

The Westpac Melbourne Institute of Consumer Sentiment index increased by a massive 9.3% in July, to register the highest reading since December 2007.

Westpac senior economist Bill Evans said the figures are “unquestionably a stunning result”, and that the index has now increased by 23.2% over the past two months, the largest two-month increase in the index’s 35-year history

“This is now the highest level of the Index since December 2007. It is 38.5% above its level a year ago and at 109.4 optimists decisively out-number pessimists for the first time since December 2007.”

Evans said the jump was a surprise, as petrol prices increased by 3.6%, the Reserve Bank left rates on hold and the Commonwealth Bank increased its mortgage rates despite no move from the RBA.

A large factor in the increase has been the “huge financial handouts” introduced by the Government to boost economic activity, Evans said.

“Note that the handouts came in two tranches. The first tranche of $8.4 billion was paid mainly to pensioners and carers in December and the second tranche of $12.7 billion has been paid to low/medium income earners over the March-May period. After Sentiment and spending failed to respond to the first tranche there was some criticism that the payments had been ‘wasted.'”

“In hindsight it appears that this first tranche may have been too narrowly based and that those receiving the payments were initially cautious given the avalanche of disturbing information associated with the global financial crisis. No such criticism can be levelled at the second tranche. It has now been almost fully disbursed and has resulted in an instant boost to retail sales and supported this surge in confidence.”

Evans also said employment figures have also played a role in consumer confidence, as the unemployment rate has remained steady.

“It appears that firms which only a year ago were nominating a shortage of quality labour as the major constraint on their businesses are now hoarding labour. The lead indicators are suggesting that firms have sharply curtailed plans to employ new workers, but the ongoing switch from full-time to part-time highlights firms’ efforts to retain workers. Workers are feeling more secure in their jobs.”

Evans also said the housing market has helped consumer confidence levels, with 52% of respondents saying they expect housing prices to rise over the next 12 months, compared to 32% in May. But he maintains that “risks still remain”.

“We still expect, despite an improving outlook for consumer spending, that second quarter GDP will print negative, reviving recessionary concerns. Evidence from the last recession points to confidence levels taking a solid hit once the unemployment rate starts to rise quickly.”

Meanwhile, the July Australian Chamber of Commerce and Industry Survey of Investor Confidence shows that business conditions, sales and profitability deteriorated over the June quarter, but expectations for the next three to 12 months are improving.

The index measuring conditions experienced by business owners fell from 52.1 in the March quarter to 51.3 in the June quarter, a record low since the survey began in 1998.

But the index measuring expectations of business owners jumped from 51.8 to 54.5 – its highest level since September 2008.

The profitability index fell from 46.6 to 45.9 in the June quarter, a record low, but the profitability expectations index jumped from 47 to 50.1.

The expected number of full-time employees index increased from 44.9 to 45.6, but full-time employment expectations remain weak.

Additionally, the survey asked applicable companies whether a relief in payroll tax would enable employees that might otherwise be laid off. Over 35% said yes, while 23.6% said no.

Greg Evans, ACCI acting chief executive, said while the survey has highlighted a further weakening in business conditions, sales and profits, conditions are beginning to show signs of improvement.

“Business sentiment has improved, with most of the forward indicators rebounding from their recent historic lows. However, these indicators are still significantly below their five year averages with most respondents expecting no change, neither deterioration nor improvement, in business conditions.”