Chief economist update: Australians not confident enough

Latest surveys show an improvement in Australian consumer and business confidence despite concerns over the impact of the bushfires, floods and the coronavirus.

The Westpac-Melbourne Institute Index of Consumer Sentiment rose 2.3% to 95.5 in February from 93.4 in the previous month.

The NAB business confidence index improved to -1 in January 2020 from a 6-1/2-year low of -2 in December 2019.

It is likely that the Reserve Bank of Australia's (RBA) optimism has infected sentiment among businesses and consumers.

Recall RBA Governor Philip Lowe's statement at the conclusion of its February 4 meeting: "The central scenario is for the Australian economy to grow by around 23-24% this year and 3% next year, which would be a step up from the growth rates over the past two years. In the short term, the bushfires and the coronavirus outbreak will temporarily weigh on domestic growth."

"Due to both global and domestic factors, it is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target.

"It remains prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time."

You, I and Irene would be dancing on the streets and singing in the rain too given the RBA's expectations for stronger domestic growth this year and the next, its promise of low interest rates for longer, and its readiness to ease policy further if needed. Add to this the wealth effect generated by the resurgence in the stock (S&P/ASX 200 index up by 6.5% this year to date) and property markets (CoreLogic RP Data Home Value Index - 5 capital city aggregate - up by 0.9% in the month of January and 5.3% from a year earlier).

Then again, and before we put on our dancing shoes and work on our falsettos, a greater scrutiny of the latest sentiment surveys suggests that the RBA - and the Morrison government - still have plenty of work ahead.

The improvement in business confidence in January could just be a statistical payback for its slide to 6-1/2-year lows in the previous month. The index has remained below its long-term average (+6) since the RBA's first of three 25 bps rate reduction in June last year.

It's the same for consumers with pessimists outnumbering optimists (below 100 index points) for the sixth straight month in January.

Pessimistic consumers will continue to save rather than spend, weakening business confidence as sales and profits decline that, in turn, lead to freezes pay hikes and/or hiring before a roundtrip back to declines in consumer confidence and spending.

Perhaps, the RBA's three rate reductions last year have yet to filter through into the general economy.

Read more: NABASXCoreLogicPhilip LoweReserve Bank of Australia
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