• Westpac/Melbourne Institute surveyed 1,200 people from October 1-10, the period predominately after the October interest rate cut.
• Three of the five components of the index rose in October. The largest increase was registered in respondent’s views on “family finances versus a year ago” up by 5.3 per cent in October.

What does it all mean?
Consumer confidence certainly isn’t going gangbusters, but it is on a more positive course. Top-line consumer sentiment recorded its second consecutive rise but the gain of just one per cent in October could be categorised as disappointing – particularly in the context that the latest survey was done predominately after the surprise rate cut last Tuesday.

In fact given the extent of the fiscal and monetary stimulus over the past couple of months you could argue that sentiment levels should be far higher, but the average Aussie is still not convinced that the outlook is all that rosy.

And the Reserve Bank would have to be questioning the immediate impact of interest rate cuts. In fact in recent reports we have discussed the more muted impact of rate cuts particularly given that almost two-thirds of Australians do not hold a mortgage. In addition the value of term deposits have outpaced loans in recent times and the cuts to interest rates effectively result in less interest income for the savers in the economy – adding to the patchy economic recovery.

It is important to realise that confidence is a fragile commodity and the ongoing concerns in the global economy can fast erode sentiment. And while the improvement in confidence is a step in the right direction it is still early days and confidence levels remain in pessimistic territory. The ongoing global economic troubles have altered consumer perceptions and entrenched the current level of cautiousness, which will take time to shift visibly, and as such it is likely that activity levels will only show an incremental improvement in coming months.

An ongoing improvement will be required to ensure policymakers feel more comfortable about the economic landscape. Importantly over the longer term the rate cuts and fiscal stimulus will have a more of a drip feed style positive impact on the economy. However it is still likely that the Reserve Bank will need to provide further rate cuts to support activity and insulate the economy not only from the downside global risks, but also to offset the lower income boost, due to the slowdown in the mining sector.

What do the figures show?

• The Westpac/Melbourne Institute index of consumer sentiment rose 1.0 per cent to a reading of 99.2 in October after rising by 1.7 per cent in September. The index is 2.0 per cent higher than a year ago.
• The current conditions index rose by 4.3 per cent, while the expectations index fell by 1.4 per cent.

Three of five components of the index rose in  October:

• The estimate of family finances compared with a year ago rose by 5.3 per cent
• The estimate of family finances over the next year rose by 2.8 per cent
• Economic conditions over the next 12 months fell by 2.4 per cent
• Economic conditions over the next 5 years fell by 4.6 per cent

The measure on whether it was a good time to buy a major household item rose by 3.7 per cent.

• Gender & demographics: Men (index reading of 101.3) were more optimistic than women (97.1).
• Young people (18-24 years) were more optimistic in October (index up 20.6 per cent to 115.0).
• Across the other demographics: 25-44 years, (index 99.0, down 5.8 per cent); 45 years plus (index 96.9, up 3.0 per cent).

What is the importance of the economic data?
Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.

What are the implications for interest rates and investors?
The Reserve Bank will probably be a bit disappointed at the latest consumer confidence results. There are plenty of good reasons for Aussies to be encouraged by the state of their economy, but we are still seeing the glass as half-empty rather than half-full.

Viewed over a longer-term perspective it is still more the case that confidence is not getting much worse, but also not getting much better. It will take a longer period of global financial stability to calm the jangled nerves of Aussie consumers.

CommSec expects the Reserve Bank to maintain its easing bias but it may be confronted with a dilemma, if house prices continue to rise at the recent monthly pace. Rate cuts would be a positive in supporting confidence and activity over the medium term but the last thing the Reserve Bank would want to do is fuel a mini-property boom.

The outlook for retailers is mixed. Consumer confidence is OK without being great, but wages are rising at a faster rate than prices. Add in the fact that unemployment is low, interest rates could be cut again, home prices and the share market are lifting gradually. Overall, consumers need to be positive about their finances before retailers can become more confident on future spending.

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