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Consumer sentiment on the increase.
Consumer sentiment rose by 3.5% in August to be 9.4% higher than a year ago
- Sentiment was buoyed by the RBA’s latest rate cut, which occurred at the time the consumer survey was taken.
- But a host of other positives were evident over the month – local shares and house prices moved higher, the unemployment rate was flat, the Government announced an early election date of 7 September and the AUD stabilised.
- Labor voters (by intention) drove the lift in sentiment which more than offset the small fall in Coalition voters (by voting intention).
Analysis
The Westpac‑Melbourne Institute of Consumer Sentiment pushed higher by 3.5% in August. The lift in sentiment took the index to 105.7, its highest reading since March 2013. A level above 100 means that the number of optimists outweighs the number of pessimists. Sentiment is now 9.4% higher than it was a year ago.
There are a number of different economic, social and political influences and outcomes that affect consumer sentiment. The best way to analyse what drove a shift in sentiment over any given month is to look at what changed in that particular month. The key event for households which took place over the past month was the RBA’s interest rate cut to a record low of 2.5%. While cutting rates is associated with a slowing economy, the consumer reaction is generally different. A lower cash rate means lower mortgage rates. And this means lower monthly mortgage repayments, the ability to repay debt quicker or cheaper new debt. All of these three factors are positive for consumer sentiment. Savers, however, are losers when rates go down. But the gain to borrowers tends to have a more positive reaction than the negative reaction by savers.
A rate cut wasn’t the only factor that contributed to a lift in sentiment over the month. Since the last reading was taken, the Government announced an early election date of 7 September. Consumers like certainty. And a firm election date eliminates the uncertainty of when households will go to the polling both. Also, over the month, shares and house prices moved higher. As a result, households felt the positive wealth effects of rising asset prices. So while the RBA has cut rates due to softening demand and concerns over the economy, consumer fears about the economy are mitigated by rising assets prices – “why would asset prices be going up if the outlook was worsening?” As such, the latest rate cut is viewed as a windfall by households. Also over the month, the unemployment rate held constant at 5.7%. And the AUD dipped and then clawed back its falls. Consumers perceive a fall in the currency as a sign of economic fragility. So the paring back of earlier falls in the month had a positive impact on consumers.
Of the five components of the headline index, the two family finance indexes drove the lift in sentiment. This reflects the lift in asset prices and the latest rate cut over the month. The breakdown by demographics shows that Labor voters (by intention) drove the lift in consumer confidence over the month. Sentiment was up 12.5% for this group of voters. On the other hand, sentiment was down 1.4% for Coalition voters. The change of leadership from Julia Gillard to Kevin Rudd has buoyed sentiment amongst Labor voters. Unsurprisingly, at a State level, sentiment surged the most in Qld (+11.0%), the Prime Minister’s home State.
All up, a positive reading on consumer sentiment today and one which bodes well for a lift in consumer spending over QIII.
