Aussie consumer sentiment surges

Aussie consumer sentiment surges amid falling petrol prices

Consumer confidence surged 9.1%m/m in August (JPMorgan +6.0%), after slumping 6.7%m in July and falling 5.6% in June. The Westpac-Melbourne Institute's consumer sentiment index rose from 79.0 to 83.8, although it still is 32% lower than its May 2007 peak. The index reading remains well below the 100 level, where the number of optimists equals pessimists.

The improvement in confidence emerged amid falling petrol prices (down 8% over the last month), growing speculation that the RBA will cut interest rates this year, and the personal income tax cuts delivered from July 1. In particular, high petrol prices have a major dampening impact on sentiment—in the three months prior to August, official interest rates had been stable but petrol prices spiked 15%, leading to a sharp fall in consumer confidence from nearly 90 to just 79.

Sentiment fell in only one of the five categories of the index - sentiment towards the economy in five years' time (-3.7%). In response to growing speculation that an RBA rate cut was imminent, however, there was a significant improvement in sentiment toward family finances vs. a year ago (+18.0%), family finances in the year ahead (+16.9%), and the economy in one year's time (+14.8%). Sentiment toward whether now is a good time to buy a major household item improved (+4.1%).

The outlook for consumer confidence depends largely on whether petrol prices continue to fall and whether the RBA cuts interest rates this year. The RBA is widely expected to cut interest rates at its September meeting. Our forecast calls for a 25bp rate cut. We believe RBA officials' desire to avoid an inflationary plunge in AUD rules out a 50bp cut. The Aussie dollar has slipped from $0.9445 at the start of August to $0.8679 currently.

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