Consumer confidence up, but does it really matter?

by Julia Corderoy22 Jan 2015
Consumer confidence has appeared to bounce back in January, increasing 2.4% over the month. However, does the increase in confidence really matter?

The Westpac Melbourne Institute Index of Consumer Sentiment increased from 91.1 in December to 93.2 in January, following a sharp fall in December. Westpac’s Chief Economist Bill Evans said it is encouraging to see the Index rise above what is normally expected in January.

“It is encouraging to at least see an increase in the Index. To be sure, the increase is not just reflecting a regular ‘holiday boost’ to sentiment that can be expected at this time of the year. The Index is seasonally adjusted so the rise indicates that sentiment has lifted over and above the rise normally seen in January.”

However, Evans said when it is assessed in the context of the sharp 5.7% fall in the Index in December it is not a particularly strong result.

“The Index is still down by 9.7% on a year ago and really only back at the levels we saw in the immediate aftermath of the Federal Budget when the Index had tumbled by 6.8%. At 93.2 the Index level indicates pessimists still outnumber optimists by a significant majority.”

The increased confidence can be attributed to the positive employment outlook and falling petrol prices.  However, Evans said the movements in the components of the index were disappointing.

“The sub-index tracking views on ‘family finances versus a year ago’ fell by 3.9% to be down 8.5% over the year, while that tracking ‘family finances over the next 12 months’ rose by a modest 1.2% to be down by 4.5% over the year.

“Despite the sharp falls in the ‘economic outlook’ components in December there was essentially no bounce-back in January. The sub-index tracking expectations for ‘economic conditions over the next 12 months’ fell by 0.7%, and the sub-index on ‘economic conditions over the next 5 years’ fell by 1.6%.”

Housing market sentiment did improve in January, according to the survey, but it is still down when compared to its levels a year ago – indicating that the gloss is coming off the property market.

“The index tracing assessments of ‘time to buy a dwelling’ increased by 9.4% following the 10.8% fall in the index in December .The index is still 11.4% below its one year ago level. This reversal of the December result removes some downside risk to the outlook for housing demand but does not change the more general picture of cooling sentiment towards housing,” Evans said.