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Chief economist update: Money buys happiness

Happy consumer makes the economy grow stronger.

The result of the latest Westpac-Melbourne Institute consumer sentiment survey disproves the aged-old adage that "money doesn't buy happiness".

Australian consumer sentiment surged by 11.9% to a reading of 105 index points - more optimists than pessimists - in the month of October that followed September's 18% jump.

No need to re-invent the wheel. According to Westpac chief economist Bill Evans: "This is an extraordinary result. The Index has now lifted by 32% over the last two months to the highest level since July 2018. The Index is now 10% above the average level in the six months prior to the pandemic."

"Such a development must be attributable to the response to the October Federal Budget; ongoing success across the nation in containing the COVID-19 outbreak; and the expectation that the Reserve Bank Board is likely to further cut interest rates at its next meeting on November 3."

In three words, that's money, money, money.

Fiscal money, amounting to "$98 billion in response and recovery support, including $25 billion under the COVID-19 Response Package and $74 billion under the JobMaker plan, unveiled in the Treasury's 2020-21 Budget on October 6.

Business revenue money as the "ongoing success across the nation in containing the COVID-19 outbreak" have seen/should see restrictions and border closures reverse allowing shops to re-open and customers to shop.

RBA money. The prospect of even cheaper loans adds money into the pockets of businesses, homeowners and consumers.

Underlying all these are consumers' job prospects and ... they've bounced.

"The survey provides us with an insight into confidence in the labour market. There was a stunning lift in confidence around job security. The Index improved by 14.2% to be back around the levels of early 2019. Despite media warnings about the looming 'fiscal cliff', respondents have become markedly more confident about job security. In particular, those over 45 saw a 20% lift in confidence - that was despite job-related measures in the Budget only providing specific support for younger employees."

Have jobs, will spend.

The government and the central bank can flood the system with money - and business operations can resume - but if consumers aren't confident about employment, handouts and dole-outs and lower interest rates will only be saved as evidenced by the increase in the household savings ratio from 3.6% in the December 2019 quarter (before the pandemic and the lockdown) to 6.0% in the March 2020 quarter and 19.8% in the June quarter - the highest it's ever been since 46 years.

Household spending accounts for a big chunk - around 60% -- of the Australian economy and their propensity to either spend or save would, in the main, influence the outlook for the general economy.

The strong recovery in consumer sentiment is a good start.

Read our full COVID-19 news coverage and analysis here.

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