Consumer confidence up but result “lacklustre”

Consumer sentiment rose by 1.2% in April to 105.3 points but economists have dismissed the result as lacklustre.

The Westpac-Melbourne Institute Index of Consumer Sentiment shows a small recovery in consumer sentiment in April, following a 2.4% fall in the index in March.

Westpac senior economist Bill Evans says that the result is “lacklustre” with households exposed to both positive and negative influences.

“On the positive side, we have seen the Reserve Bank hold rates steady for the fifth consecutive month,” Evans says.

“The Australian dollar has reached the remarkable level of $1.05, buoying those Australians who do not work in exposed industries like tourism and retail.”

“Job prospects and security remain strong; it was recently announced that employment increased by 37,800 jobs in March, reducing the unemployment rate to 4.9%.”

“On the negative side, we have seen the frightening events in Japan and ongoing turmoil in the Middle East and North Africa. This has seen the crude oil price rise.”

Evans says the strength of the Australian dollar has restrained petrol prices locally, but predicts households are bracing for higher prices in the future.

According to Evans, the survey paints a bleak picture for city dwellers, citing high debt levels, fragile house prices, rising interest rates, and the increasing cost of health, utilities and education.

“The confidence index for the metropolitan area is now below the index for the non metropolitan areas for the first time since August 2009,” he says.

Despite this, the index that tracks views on whether it’s a good time to buy major household items rose by 3.5% in April, putting it 29% above April 2009 level.

The index tracking views on finances, relative to a year ago, rose by 0.1% while the index tracking expectations on finances over the next 12 months increased by 1.4%.

Evans believes the there is little chance of any change in interest rates at Reserve Bank’s next board meeting in early May.

“We expect the Reserve Bank’s measure of quarterly underlying inflation to rise from 0.4%, registered last January, to 0.7% in April,” he says.

“That will be consistent with the bank’s current forecast of around 2.75% for 2011. Of much more importance will be wages and employment.”

Evans says the mining boom, and the surge in the terms of trade, have given a huge boost to national incomes and the risk is that this boost shows up in rising wages and employment.

“With the unemployment rate already below the bank’s assessment of full employment and the lead indicators pointing to ongoing strength in jobs growth, the bank will be most sensitive to labour market pressures,” he says.

“We continue to give a reasonable chance to another rate hike in the September quarter but expect, given the ongoing evidence of a concerned consumer and sluggish housing market, a follow-up move will not be necessary until well into 2011.”