THE BIG PICTURE: Confidence rising, but the RBA still has room to cut

The latest readings on business and consumer confidence were decidedly mixed. While businesses remained rather gloomy about trading conditions, consumers were less pessimistic about life, with confidence levels surging by the largest percentage gain in five months.

Interestingly, if you had to make a choice between the two, the improvement in consumer sentiment is just what the doctor (or, in this case, the Reserve Bank) would have ordered. The reason being is that a pick-up in consumer confidence is a leading indicator, resulting in improving activity levels and eventually boosting business activity, trading conditions and overall business sentiment.

Given the importance of the consumer confidence figures, it is worth breaking down the areas of improvement. All five components across the sub-categories were higher with the largest increase recorded in “expectations of economic conditions over the next 12 months” which rose by 5.8% in July. But what was even more important was the “the estimate of family finance compared with a year ago”, which rose by 28% in the past two months – a result that was clearly due to the additional room created in the household budget as a result of the multiple rate cuts, Federal Government handouts and lower fuel prices. In effect, everything that could go right for consumers did. In fact, had consumer confidence tracked lower in July it would have been far more worrying.

And while the improvement in confidence is a step in the right direction, it is still early days and confidence levels remain in pessimistic territory. Importantly, the tax cuts and cessation of the flood levy from July 1 will further boost confidence in coming months.

The ongoing global economic troubles have altered consumer perceptions and entrenched the current level of cautiousness, which will take time to shift visibly. And, as such, it is likely that activity levels will only show an incremental improvement in coming months – in effect, resulting in businesses remaining cautious and having to combat tough domestic trading conditions over the near-term. The Reserve Bank will maintain its easing bias and may provide a further rate cut to support activity in August. The June quarter inflation data released on July 25 will be the next hurdle.