Consumer sentiment in positive zone

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Consumer confidence is again on the rise with the number of optimists outweighing pessimists according to new research.

The latest Westpac Melbourne Institute Index of Consumer Sentiment increased by 1.1% in October to 102.4. A reading above 100 indicates positive consumer confidence.

The main components of the Index remained largely steady over the month:

  • ‘Family finances compared to a year ago’ fell by 0.4%
  • ‘Family finances over the next 12 months’ lifted by 0.9%
  • ‘Economic conditions over the next 12 months jumped by 5.8%
  • ‘Economic conditions over the next five years’ was unchanged
  • ‘Time to buy a major household item’ fell by 0.4%’

Bill Evans, chief economist of Westpac, highlights that over the last six months, five readings have hovered just above 100.

“This result extends a remarkable run of stability in the Index,” he notes. “This has been despite some significant local events including two rate cuts from the Reserve Bank; a very close election result and the aftermath of the May Budget.”

Evans attributes the ongoing stability in the labour market as one explanation for the overall boost to confidence.

“The average print for the Index over the last six months is 138.2 – emphasising the stability of the current assessment of the labour market, he says. “This average read is 8.0% below the average of the same six months a year ago indicating a definite improvement in respondents’ assessments of the conditions in the labour market.”

However, confidence in the housing market is patchy, with the ‘time to buy a dwelling’ index down by 3.3% in October from 105.7 to 109.3. On the other hand, house price confidence improved by 1.6% to be 12.1% highlight than the level one year ago.

“House price expectations in NSW lifted by 2.6% in the month to be 20% above the level a year ago,” says Evans.

“There have been solid improvements in expectations across the major states over the year with Victoria up by 6%; Queensland by 9% and Western Australia by 15%. With vacancy rates rising and prices falling in Perth we had been surprised by the resilience in respondents’ expectations for prices in WA although this month we have seen a disturbing 16% fall in expectations in one month.”

And despite speculation the Reserve Bank will drop interest rates at its next meeting on 1 November, Evans believes rates will remain on hold for the near future.

“We were never convinced that the inflation report which is due to be released on October 26 would provide the case for a cut,” Evans notes.

“In fact, with a 0.3% reading for the underlying inflation dropping out, it seems likely that the September quarter report will actually show that annual underlying inflation has lifted.

“Indeed while we give little probability to a further rate cut at the next meeting our assessment of the growth outlook, including the shape of the construction cycle, points to rates remaining on hold for the foreseeable future.”

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