The Westpac–Melbourne Institute Consumer Sentiment Index surged by 5.2 per cent in September to 119.3 from 113.4 in August.
Westpac’s chief economist, Bill Evans said it was the highest level of the index since July 2007.
“The index has increased by 34.4 per cent over the last four months – the largest four-month increase in the 35-year history of the index.
”The standout story is the ‘relief rally’ for consumers – relief that the economy has avoided recession and that expected job losses have not materialised. This is clear from the survey detail,” said Evans.
The biggest shift over the last four months has been in components that capture expectations (+49.6 per cent). In contrast, components measuring views on current conditions have risen by a more moderate 14.4 per cent over this period.
“Indeed, the mix casts some doubt over how much the surge in sentiment will translate into actual spending,” he said.
Looking back, the index has only been above current levels in four previous periods: January–April 1984; March–July 1994; January–February 2005 and May–July 2007. Each of these coincided with boom times in consumer spending.
However, they were also periods in which sentiment reads on ‘current conditions’ were at much higher levels – well over 120 in terms of the Current Conditions Index vs a reading of 109.5 in September.
“Over the last six months consumer spending has only grown at about a 2.5 per cent annual pace and our current outlook is for consumer spending to consolidate over the second half of 2009 before accelerating to three per cent growth through 2010. If these levels of confidence can be sustained then the outlook for consumer spending growth will need to be substantially upgraded,” said Evans.
Approximately 70 per cent of respondents assessed current economic conditions as favourable compared with approximately 35 per cent in June. Given the extensive media coverage of likely rate hikes, it is surprising that respondents are relatively evenly divided on their assessments of interest rate news.
“That resilience to the rate outlook is exemplified by the attitude of those folks holding a mortgage – their confidence actually rose by 4.4 per cent. This result highlights an important point that will be significant when assessing the impact of initial rate hikes on sentiment,” said Evans.
“The extremely positive response to news items will be driven by the improving outlook for the world economy; the resilience of Australia’s labour market; and the stronger than expected growth in the June quarter. Even a 2.7 per cent rise in petrol prices failed to deter the consumer.
“Despite this stunning rally in confidence respondents remained wary about raising risk in their investments. The Index of whether now is time to buy a dwelling slipped by 0.6 per cent,” he said.
Respondents still see bank deposits (26.7 per cent) as the wisest place for savings followed closely by ‘pay down debt’ (25.5 per cent). Both shares (13.4 per cent) and real estate (15.6 per cent) were fairly stable at relatively subdued levels.
The Reserve Bank Board next meets on October 6. The case for a rate hike as early as next month has been strengthened considerably by this further surge in confidence.
“However, important data released over the next few days will give the bank a better read on the current economic momentum,” said Evans.
“Our current forecasts point to a slowdown in that momentum that would probably motivate the bank to defer any decision for another month at least. However, evidence over the next few days that this momentum has not slowed would clear the way for an immediate rate hike.”