POPULAR WORDS

August 12, 2010

The Westpac–Melbourne Institute Index of Consumer Sentiment rose by 5.4 percent in August from 113.1 in July to 119.2.

After tumbling by 15 percent in the wake of three consecutive rate hikes in March, April and May the Index has now recovered by 17 percent in the last two months.

Westpac's Chief Economist Bill Evans says the Index is now back to around the level it reached at the beginning of this year and the levels seen prior to the beginning of the rate hike cycle in September last year.

“There were many reasons to expect the Index to rise in August although a 5.4 percent increase following the 11.1 percent increase last month is much larger than we expected,” Evans says.

He says the most important factor was the decision by the Reserve Bank to keep its overnight cash rate steady in August.

“There had been intense media speculation about a rate hike and we certainly assessed that a likely high read for inflation in the June quarter would have resulted in a rate hike. In the event the inflation report printed a surprisingly low number which allowed the Reserve Bank to avoid a rate hike.”

POSITIVE OUTCOMES OF RATE HOLD

According to Evans, the significance of the rate decision can be seen with the 10.2 percent increase in the confidence of those who hold a mortgage compared to a 0.9 percent reduction in the confidence of those respondents who wholly own their property.

However, confidence amongst people who rent was also up by 10.2 percent so other factors were also at work.

News on the labour market was strong, with a total of 45,900 new jobs added for June and the unemployment rate held at a low 5.1 percent.

Petrol prices fell by 2.6 percent; the Australian dollar rose by 4.6 percent against the USD; and the Australian share market was up by 3.9 percent.

HOUSEHOLD CONFIDENCE ON THE MEND

It appears uncertainty over the election result, which may have contributed to a surprise fall in business confidence, does not appear to be affecting households.

“Sentiment towards housing and purchasing a motor vehicle also firmed. The Index measuring whether now is a good time to purchase a house rose by 9.1 percent,” Evans says.

“Households are also more confident about purchasing a motor vehicle with that Index rising by 7.5 percent. As with overall Confidence much of the negativity about housing and cars which built up in the wake of the recent series of rate hikes has dissipated,” he says.

INDEX BREAKDOWN

All components of the Consumer Sentiment Index increased in August.

The assessment of family finances versus a year ago rose a further 5.7 percent after rebounding sharply in July from a June slump.

Expectations for family finances over the next 12 months also posted a solid 6.1 percent rise.

Sentiment on the economic outlook – which has been notably stronger than views on family finances in recent months – also improved in August with an 8.6 percent rise in expectations for the next 12 months.

“Most notably, consumers’ opinions on ‘whether now is a good time to buy major household items’ also posted a solid 3.5 percent rise with this component index now at its highest level since July 2007. This bodes well for retailers as we head into the Christmas sales season,” Evans says.

“In the absence of any major new disturbances from the global economy further evidence of steady rates should start to see a firming of housing and consumer spending through the second half of 2010. By 2011, a more confident consumer; improving housing market and a lower unemployment rate should see a resumption of the tightening cycle,” he adds.