It appears we are feeling a bit more like our old selves. Consumer confidence has surged over the past two months, reaching the same level as in July 2018 – well before COVID-19 was a household word.
Westpac’s Consumer Sentiment Index rose by almost 12 per cent in October, following an 18 per cent jump in September. This is a 32 per cent increase in just two months, and brings confidence to a level that is 10 per cent higher than the average level in the six months before the pandemic began.
Levels of consumer confidence – which reflect the degree of optimism people have about the state of the economy – can be broken down into the following segments.
As we can see from the graph, each segment of consumer confidence is on the rise.1 A number of indexes – including time to buy a dwelling, time to buy a major household item, economic conditions for the next five years and family finances for the next 12 months – are now above 100, indicating more optimists than pessimists.
Why are consumers so optimistic?
The results may come as a surprise to those who have been hoping 2020 will soon be a distant memory. Westpac’s chief economist Bill Evans has called the turnaround in confidence “extraordinary”.2 But there are a number of reasons why confidence is returning with vigour.
To start with, virus cases appear to be both very well controlled and dwindling. While small outbreaks have been occurring, they are being quickly contained. Even Victoria has been looking very promising in recent weeks, with cases now as low as or lower than other states. As a result, consumers are understandably optimistic that damage from the virus can be contained as governments show strong leadership, and our testing and tracking systems seem to be working well. Particularly with parts of Europe, North America and other countries in the world plunging into their second and third waves, it’s not surprising that by comparison, Australia seems to have mitigating the spread of the virus well in hand.
Consumers have also had a very positive response to this year’s Federal Budget. Substantial consumer tax cuts and employment incentives have helped Australians feel supported financially. Business tax cuts, investment incentives and numerous schemes to boost employment and support industry also show the government has clear plans to manage and support the economy when and where it’s needed.
As a result of the confidence around the economy and finances over the next 12 months, willingness to buy a dwelling or a major household item was well up over the two-month period. This may also be due, in part, to better-than-expected performance of the labour market. The number of employed people rose significantly between May and September, with the figure clawing back around half of what it lost between March and May.3 The latest unemployment figure is still at 6.9%, which, while much higher than normal, is still better than many of the dire forecasts of recent months. The extension of government financial supports into next year, like JobKeeper, is cushioning some of the concern around employment and income.
The outlook for continued low interest rates is also factoring in to consumer confidence, particularly among homeowners or those considering a home purchase. There is so far almost no indication that interest rates could rise over the short term. The expectation of a further interest rate cut – possibly even next month – is an added bonus.
The increase in consumer confidence is great news for all sectors of the economy. When consumer confidence is high, people tend to spend more money, which increases demand for goods and services. This allows businesses to invest, hire more people and increase wages, in turn facilitating more spending.
As we head into the home stretch of 2020, let’s hope cases of the virus remain low so that Australia can continue on this upwards trajectory.
SOURCES: 1https://www.www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/economics-research/er20200909BullConsumerSentiment.pdf, 2https://www.propertyobserver.com.au/forward-planning/investment-strategy/property-news-and-insights/117940-consumer-confidence-jumps-following-budget-announcement.html, 3https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/latest-release