Consumer sentiment has gained an unexpected 11.1% in July, according to the latest Westpac-Melbourne Institute Consumer Sentiment index, representing the strongest monthly increase since the 1970s.
The index moved from 101.9 points to 113.1, and is now at its highest point since April. This comes after a 5.7% decline in June due to fears regarding the turmoil in financial markets and the ongoing negotiations for the Government’s proposed mining tax.
But Westpac chief economist Bill Evans said in a statement that since then, the Reserve Bank has kept rates on hold and mining negotiations were successful.
“We expected to see a bounce-back in the Index after it had tumbled by 12.3% since April. Another substantial fall would have put it in dangerous territory with a slide comparable to that seen entering the early 1990s recession and in 2007/08 prior to the global financial crisis.”
“However, we were surprised at the vigour of the bounce back. We saw a comparable surge in confidence in 2009 when households realised that Australia had avoided recession but at that time the Index was recovering from a much lower level.”
Evans also points out global markets have recovered during the past month, along with the local equity market and labour force data from last month showing unemployment fell to 5.1%.
However, he also says interest rates do not appear to be the biggest reason behind the July increase. Instead, he says sentiment has risen due to increased confidence regarding the negotiations with mining companies.
“All components of the index increased in July. The assessment of family finances today relative to a year ago rebounded 17.2% after a 17.7% slump in June. Expectations for family finances over the next 12 months rose by a more subdued 7.3% but had seen a milder fall in June.”
“In a positive sign for retailers, consumers’ opinions on “whether now is a good time to buy major household items” rose 7.3%, more than reversing the 5.6% fall over the previous two months.”
Consumers are also upbeat regarding their expectations for the economy, with the index addressing the economic outlook for the next year rising 10%, with the five-year outlook up 16.2%.
With official inflation data set to be released soon, Evans says the Reserve Bank is sure to increase interest rates.
“We expect [inflation] to be sufficiently high to trigger a rate hike at the August meeting. The return of confidence levels to 11.4% above its long term average only adds to the case for a rate hike.”
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
