Consumer confidence rebounds to a 4-year highConsumer confidence
Consumer confidence: The Westpac/Melbourne Institute survey of consumer sentiment rose by 3.6 percent in December – a 4-year high – after falling by 1.7 per cent in November. The index now stands at 103.3 (long-term average 101.5). A reading above 100 denotes optimism. 
What does it all mean?
Aussie consumers are feeling chipper as we enter the festive period. Confidence rebounded to 4-year highs in December. This is a very positive and welcome development for Australian retailers during the all important Christmas trading period, especially given the recent entry of e-commerce giant Amazon into the market.
All five components of the Index increased during December. Consumer views on their finances and economic conditions improved with the Reserve Bank confirming a 16th consecutive month of record low interest rates of 1.5 per cent in early December. A period of interest rate stability through to the end of next year is likely, boosting sentiment, especially for consumers contending with anaemic wages growth, elevated household debt, rising utility bills and petrol prices.
Political events may have also improved confidence with the marriage equality legislation passing through the Australian parliament. The Turnbull government may also turn its attention to introducing personal and business tax cuts next year, which could potentially be a positive development for workers starved of pay rises. Australia also took a 2-0 series lead in the Ashes cricket series with England, further adding to the ‘feel good’ factor.
Unemployment expectations fell further in December and is now down by more than 8 per cent over the year. The labour market is strengthening with the unemployment rate expected to hold at 4½-year lows of 5.4 per cent nationally for November, when released tomorrow. A tightening labour market, receding job security fears and evidence of emerging skills shortages in some sought after occupations is expected to eventually result in a gradual increase in wages growth. However, there is still some slack in the labour market and further jobs gains are required to lift wages. Sentiment has bounced notably in Queensland helped by strong employment growth.
A cooling in house prices, particularly in Sydney, are encouraging first home buyers back into the property market. Improving housing affordability may be behind the pick-up in the “time to buy a dwelling” index outcome.
Aussies remain conservative with their savings, but have shown very tentative signs of reducing their preference for paying down debt (down by 3.1 per cent). In terms of the “wisest place for savings”, consumers still prefer bank deposits (31.8 per cent), despite term deposits yielding just 2.25-2.5 per cent. Superannuation was steady at 5.9 per cent. However, only 12.8 per cent nominated real estate and 7.8 per cent shares in December. Bonds lagged at 1.6 per cent.
What do the figures show?Consumer confidence
The Westpac/Melbourne Institute survey of consumer sentiment rose by 3.6 per cent in December – a 4-year high – after falling by 1.7 per cent in November. The index now stands at 103.3 (long-term average 101.5). A reading above 100 denotes optimism.
The current conditions index rose by 4.0 per cent and the expectations index increased by 3.4 per cent.
All five of the components of the index rose in December:
The estimate of family finances compared with a year ago was up by 5.6 per cent;
The estimate of family finances over the next year was up by 1.8 per cent;
Economic conditions over the next 12 months was up by 5.0 per cent;
Economic conditions over the next 5 years was up by 3.4 per cent;
The measure on whether it was a good time to buy a major household item was up by 2.8 per cent.
Housing outlook: A good time to buy a dwelling? The index was up by 2.3 per cent in December. However, house price expectations fell by 0.4 per cent.
Unemployment expectations: Unemployment expectations fell by 2.4 per cent in December and is now down by 8.2 per cent over the year.
What is the importance of the economic data?
Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.
What are the implications for interest rates and investors?
The better-than-expected recent readings on retail trade and consumer confidence provide us with cautious optimism that consumer confidence and restrained retail spending may have bottomed. That said, retailers still remain under pressure from increased global competition and technological disruption.
The wages growth ‘puzzle’ (i.e. jobs growth/wages link) still needs to be resolved before the Reserve Bank will move interest rates. Therefore, official interest rates are unlikely to change for the next year.
Originally published by Ryan Felsman, Senior Economist, CommSec