Consumers are feeling more confident, with caveats

Australian households are feeling better about their finances, with an improving outlook for inflation and interest rates brightening their mood, although they are wary about the potential ripple effect on the economy from Donald Trump’s U.S. election victory. 

The Westpac–Melbourne Institute Consumer Sentiment Index rose 5.3 per cent to 94.6 in November, from 89.8 in October, its strongest level in two-and-a-half years and marking a 14.4 per cent recovery from the low-point seen in mid-year.
 

The survey was conducted in the week commencing Nov. 4, with responses taken both before and after the U.S. poll. An index reading of 99.7 prior to the election result was followed by a sharp drop to an average 91.1 once it became clear that Trump would be the winner. 

These swings make the November result trickier to assess. Whether the strong start or weaker finish to the week are a better guide to underlying sentiment depends on how lasting the post-U.S. election drop is likely to be. But clearly there is some wariness about the implications for Australia if Trump follows through on his plans for trade tariffs and tax cuts.

Read more: Trump’s bark may be worse than his bite on trade 

Still, the mood does look to be improving and that’s an encouraging sign for retailers ahead of the all-important Christmas high season. 

The November surveys include an additional question about Christmas spending intentions, asking consumers whether they plan to spend less, the same, or more on gifts than last year. Responses show just over 35 per cent of consumers plan to spend less on gifts than last year. However, that is a clear improvement on the 40 per cent that were planning to cut back this time last year.

The survey week also coincided with the latest RBA decision, and the fact this had no effect on sentiment is a sign that consumers are no longer concerned about the risk of further rate rises. 

That’s contributing to growing confidence in the economic outlook, with the sub-index showing views on family finances over the next twelve months rising strongly to 104.4 – indicating there are now more optimists than pessimists. 

The latest survey also pointed to a more upbeat view on the labour market and housing affordability. 

The unemployment expectations sub-index fell 7.2 per cent to 120.5 in November, marking the most confident labour market assessment since April last year, while the ‘time to buy a dwelling’ sub-index surged 11.3 per cent to its highest read in nearly three years.

Upcoming data on wages growth and demand in Australia are likely to provide further confirmation that domestic inflation pressures are subsiding, and we believe the RBA Board should be in a position to start cutting the cash rate by its February meeting.