In recent months, commentators and economists have pointed to a divergence between consumer sentiment and business confidence in Australia. Most have put the difference down to a lack of wages growth. Low wages growth is good for business in keeping costs down. However, households’ propensity to spend is hampered. Other explanations, such as households’ debt levels and the threat of higher mortgage rates have also been put forward.
The latest survey of consumer confidence may be the beginning of an alignment of the business and household sectors. According to the latest Westpac-Melbourne Institute Consumer Sentiment Index, households were more optimistic than a month ago as the Index reading jumped from 99.7 in November to 103.3 in December. Any reading below 100 indicates the number of consumers who are pessimistic is greater than the number of consumers who are optimistic. The long-term average reading is just over 101.
The survey was held in the first week of December. Westpac chief economist Bill Evans thinks attention on the possibility of higher interest rates may have waned. “A less threatening outlook for interest rates appears to have boosted confidence. During that September quarter households were spooked by media and many commentators saying that interest rates were likely to start rising in the new year. That effect has now calmed down significantly.”
The boost in consumer confidence could be expected to result in greater household expenditure and thus add to the overall level of economic activity. The Westpac economist is not sure. “[We] doubt whether this welcome lift to confidence will be sufficient to see the Bank [RBA] achieve its ambitious growth forecast in 2018 of 3.25%. Constraints around incomes, savings and debt are still likely to keep consumer spending growth below trend.” As a result, he does not expect any rate rises in 2018 and for the RBA cash rate to remain at 1.5%.
Bond market yields and the local currency rose on the day. 3 year bond yields added 2bps to 1.98%, 10 year bond yields remained unchanged at 2.52% but the local currency jumped by around three-quarters of a U.S. cent to around 76.40 U.S. cents.