Written on the 18 January 2017 by Business News Australia

CONSUMER confidence remains at its weakest point since April 2016, according to the latest Westpac Melbourne Institute Index of Consumer Sentiment, despite low interest rates and rising equity prices in the lead up to the New Year.

The index rose by just 0.1% in January, from 97.3 in December to 97.4, failing to make up for the 3.9 per cent decline in December.

Westpac's Senior Economist, Elliot Clarke (pictured), says pessimists clearly outnumbered optimists for a second consecutive month (100 is the neutral point).

"December and January are the weakest outcomes since April 2016, when the Index printed at 95.1," says Clarke.

"During the intervening seven months, the Index has averaged 101.5, aided by interest rate cuts from the RBA and, in May, a more favourable Federal Budget".

"The absence of a rebound in January is a disappointing result, particularly when one factors in the cumulative 10% gain for Australian equities over the past two months and, to a lesser extent, a nascent improvement in the pace of job creation.

"On the other hand, there are likely to be lingering effects from the shock of the announcement just before the December survey that the economy contracted by 0.5%."

The sub-components of the Index were volatile during January.

The 'economic conditions, next 12 months' index experienced a partial rebound from December's 5.2% fall, rising 2.5%.

Longer-term expectations deteriorated further, as the 'economic conditions, next 5 years' sub-component fell a further 1.4% in January following the 2.5% fall in December.

From their respective post-Budget peaks in May 2016, the short and long-term economic conditions sub-components are down almost 8% and 10% respectively.

Views on family finances are also mixed.

Having fallen 2% in December and a further 7.6% in January, the 'family finances relative to a year ago' deteriorated and is down 16% from its February 2016 peak.

'Expectations of family finances over the next 12 months' lifted by 0.3% in January and is down by 3.7 per cent since last year's peak in August.

"Despite the marked deterioration in current perceptions of family finances, the 'time to buy major household items' sub-component has also held up well," says Clarke.

"A 4.9% rebound in January followed December's 7% decline. At 120.4, this sub-component is only marginally below its post-Budget average of 122.3."

The Westpac Melbourne Institute Unemployment Expectations Index edged another 0.8% lower in January.

"Remember, a decline in the Index indicates consumers hold a more favourable view of the labour market," says Clarke.

"Unemployment expectations have now fallen by 6% since their 2016 high in March and by nearly 12% since their most recent peak, September 2015.

"That said, the Index still remains above its long-run average, signalling a lingering degree of apprehension over job prospects."

The 'time to buy a dwelling' index fell 2% in January to be back near its most recent low of November 2016, leaving the around 6% above its 2016 low, reached in April, around 16 per cent below its historic average.

However, the Westpac Melbourne Institute Index of House Price Expectations surged again in January to 149.6, its highest reading since April 2015 (152.1).

"NSW again led the charge in January. However, material gains were seen in house price expectations across the nation. For all states except WA, price expectations are above their respective long-run averages," says Clarke.

He expects the Reserve Bank board to keep rates on hold when it meets on February 7.

"While the 0.5% contraction in the Australian economy in the September quarter would have come as a surprise and that result has undoubtedly had a lasting impact on Consumer Sentiment, we expect the Board will be more confident about the economic outlook for 2017."

"A boost to the terms of trade from higher commodity prices; sustained strong conditions in the major housing markets; still positive forward indicators for jobs; a stronger global outlook; a boost to resources exports; and a significantly reduced drag from mining investment point to the Australian economy's growth rate lifting from the current 1.8% to 3.0% in 2017, precluding any need for further rate cuts."

Business News Australia
Author: Business News Australia





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