Consumers in Australia are more confident as interest rates remain on hold and job prospects are increasing although sentiment has been dented by the earthquake in Japan and unrest in North Africa and the Middle East, an index reveals.
The Westpac-Melbourne Institute index of consumer sentiment in Australia rose 1.2% in April from March. The index rose to 105.3 points in April in seasonally adjusted terms from 104.1 points in March.
In annual terms though, the consumer sentiment index fell 9.3%, and Westpac chief economist Bill Evans said that is because in recent months households have been exposed to both positive and negative influences.
On the positive side, interest rates have been held steady for five months, while the Australian dollar has risen to 29-year highs, he explained. Job prospects and security remain strong. But higher oil prices mean that petrol prices have increased by 3% and the property market is sluggish.
It was recently announced employment increased by 37,800 jobs in March. The survey shows there has been a sharp improvement in conditions in the labour market and this improvement has caused a considerable upward revision to the growth rates of the Index.
The message from the Index has changed from one of charting an ongoing slowdown in the growth pace of the Index to one of relative stability over the last six months.
'Apart from before periods of excessive disruption such as during the global financial crisis or the period around the introduction of the GST, growth in the Index has tended to bottom out at or slightly below long term trend. If in this cycle growth in the Index bottoms out 1 to 1.5 ppt's above the long term trend then prospects for growth in 2011 are buoyant,' said Evans.
'That outlook is in line with Westpac's view that demand growth in 2011 will be considerably stronger than average at around 4% in 2011. Business investment and the labour market are key factors in this positive outlook,' he explained.
'The annualised growth rate of the Leading Index has now been relatively steady over the last six months. Growth in September last year was 4.9%. However, there has been a rebalancing of the forces which are driving the growth,' he added.
The Reserve Bank Board next meets on May03 and there is little chance of any change in rates at that meeting despite an inflation report that will be released on April 27. 'We expect the Reserve Bank's measure of quarterly underlying inflation to rise from 0.4%qtr, registered last January, to 0.7%qtr in April. That will be consistent with the Bank's current forecast of around 2.75%yr for 2011. Of much more importance will be wages and employment,' said Evans.
'The mining boom and the surge in the terms of trade have given a huge boost to national incomes and the risk is that this boost shows up in rising wages and employment despite a likely increase in the profit share. With the unemployment rate already below the Bank's assessment of full employment and the lead indicators pointing to ongoing strength in jobs growth the Bank will be most sensitive to labour market pressures,' he added.
Evans points out that there is some sentiment that interest rates could rise in the September quarter but adds; 'given the ongoing evidence of a concerned consumer and sluggish housing market, a follow up move will not be necessary until well into 2011'.
On the negative side, the recent string of disasters in Japan and the effect on oil prices of political unrest in North Africa and the Middle East means that fuel prices have increased by 3%.