Consumer Confidence Rises Despite Fears for the Aussie Economy

Well, that didn’t take long. Consumer confidence has bounced back this month, following January’s 3.5% decline.

The latest Westpac-MI consumer index shows sentiment rose to 101.3 points so far this month. That’s above the 100 point level in which optimists outnumber pessimists. Amazingly, it’s only the fifth time in two years that optimism has been in the ascendency.

With the uneasiness surrounding global markets, you might wonder why everyone’s feeling so cheerful. And, to be fair, it’s hard wrapping ones head around it. We can’t say for sure, but you suspect it has something to do with fears overshooting realities. People have a habit of believing markets reflect economies more than they actually do. But when the storm clears, we realise this isn’t really the case. Either way, consumers chose to focus on the upsides of difficult circumstances.

Perhaps they also realised that what seems bad on the surface can actually benefit them. Take those very same January market wobbles as an example.

Commodity price falls were a huge factor in driving the spate of selloffs last month. But households tend to benefit from cheap oil. Affordable petrol prices leave us with more disposable income to spend on other goods.

Yet, whether it’s logical or not, market volatility sways us all. We can’t help but believe markets represent the broader economy. It’s a subconscious reaction we all have, driven by emotion rather than reason.

To be fair, those worries are warranted at times. Market volatility certainly can suggest fundamental faults in an economy. But other times, this relationship is flimsy at best. Of course, that’s not to say that there isn’t anything wrong with the global economic system today. Just that we shouldn’t see every market rout as a sign the world is ending.

We won’t go into detail between any relationship markets and consumer confidence shares. But we know, to a certain degree, that it’s an important one. For this, we need only look at the index measuring ‘family finances relative to a year ago’. That indicator had fallen by 9.4% last month. But it was back up in February, climbing 11.3%. Compared to February 2015, household sentiment on family finances is trending 3.4% higher.

That might also explain why people are keener to buy bigger ticket items. The ‘time to buy a major household item’ index was up 3.1% this month. Though it remains 1% down on this time last year.

Elsewhere, people are feeling better about their finances in the year ahead. ‘Family finances over the next 12 months’ rose 3.8% this month. Interestingly, at 104.7, the index is up on the last two years. Which is curious, if nothing else. It means households feel richer today than they did two years ago.

I don’t know about you, but that seems somewhat irrational. Rising house prices could explain it, sure. But house price growth is as low as it’s been for years, so that can’t be it.

Aussie economy:
consumer confidence continues to drop
While people feel optimistic about personal finances, the same isn’t true of the Aussie economy. As the Westpac-MI report indicates, the outlook on the Australian economy remains gloomy.

The ‘economic conditions over the next 12 months’ index was down 0.6% this month. What’s more, it’s 2.4% lower than this time last year. This index has been on a downward trend for the past two years. Again, this raises more questions than it answers. How is it that we’re seeing personal finances and the economy diverge so much? People are saying they feel richer, but in an environment that’s making it harder for them to feel that way. It doesn’t make much sense.

In any case, economic conditions over the next 5 years saw sentiment fall by 4%. Which, given recent circumstances, doesn’t come as much of a surprise.

On the jobs front, the outlook was equally glum. It only follows that, with economic prospects down, unemployment expectations would weak too. And that’s exactly what happened.

Despite a 5.9% jobless rate, unemployment expectations rose by 1.9% to 145 on the index. In this case, a higher reading indicates a ‘pessimistic’ outlook for unemployment. This index is now 7.7% above the most recent low, set back in October last year.

Unemployment expectations may also be rubbing off on housing market prospects. As the report states:

After sending some encouraging signals in January, sentiment towards housing soured again in February. Some of this variation is likely to be seasonal. The ‘time to buy a dwelling’ index fell 12% to 99.3 after increasing by 14% in January. The Index is now back at its December level. It is 21% below its level of a year ago.

Despite the overall Index being back at its December level there has been significant movement amongst the states with NSW and Victoria substantially above the December levels and the smaller states all well below.

We saw a similar story for House Price Expectations. After lifting by 20.5% in January this Index fell by 12.5% in February. However the Index is still comfortably above its December lows.

That’s more in line with what you’d expect to see.

Last month, we saw the opposite take place. Consumer confidence fell, despite households feeling better about buying a home. These latest figures suggest a return to more normal levels and expectations.

Ultimately, there’s no major insight to glean from these findings.

The bump in sentiment this month is likely a result of market panic petering out more than anything. Aside from that, people remain concerned about the direction of the economy. But that’s not particularly revealing or insightful to you. We’ll just have to keep track of where consumer sentiment goes next.

Mat Spasic
Junior Analyst, Markets and Money

PS: Australia’s unemployment rate is holding steady, but for how long? Weak growth prospects are forcing businesses to cut back on spending. This will ramp up in 2016, as weaker economic activity catches up with the labour market.

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