Index jumps to highest level in two years.

The Westpac Melbourne Institute Index of Consumer Sentiment has jumped by 8.5% from 95.1 in April to 103.2 in May. Most importantly for appliance retailers, all the response to the question, the ‘time to buy a major household item’ increased by 4.9%.

According to Westpac’s Chief Economist, Bill Evans (pictured), “The Index has now reached its highest level since January 2014. This result would have been affected by two very significant events: the Commonwealth Budget and the Reserve Bank’s decision to cut the overnight cash rate from 2% to 1.75%.

“Our analysis indicates that the dominant driver of the boost to confidence has been the rate cut. Sharp increases in the Index in response to rate cuts are fairly common, although they depend somewhat on other events at the time and whether moves were expected. The last four rate cuts have seen the Index rise on average 6.6%, with gains ranging from 3.5% to 8.5%,” Evans explained in a statement today.

Bill Evans

“Supporting this view has been a stunning 15% increase in the confidence of those respondents in the survey who currently have a mortgage. On the other hand, we were able to gauge respondents’ specific assessments of the Budget by asking the special question: “What impact do you expect the Federal Budget to have on your family finances over the next 12 months?” The net percentage was -22.4% compared with -22.5% in 2015 and -56.1% in 2014 (a negative means respondents saying ‘deteriorate’ outnumber those saying ‘improve’).

Evans said that since the question was first asked question in 2010, all net responses have been negative and the 2016 response is the second highest over that period

However, he noted that this result was hardly the sort of glowing response that would explain an 8.5% jump in the Sentiment Index.

“Other aspects of the survey were also encouraging. Both Westpac and the Government were forecasting the unemployment rate to fall further to 5.5% by mid- 2017. Consistent with this view was a 5.8% fall in the Westpac Melbourne Institute Index of employment.

Yet Evans advised caution “at this juncture” with the Reserve Bank strongly favouring the ‘family finances vs a year ago’ sub-index as an indicator of future spending patterns. This component increased the least in the survey and is still below its level of two months ago.

“Consumers’ assessments of housing conditions improved, although there was a fall in confidence around the outlook for house prices. The ‘time to buy a dwelling’ lifted by 12.1%, although it is still 6.4% below its level a year ago. The strongest gains were in the most volatile state – New South Wales.

“On the other hand, we saw a more subdued outlook for house prices with a 2.6% fall in the Westpac Melbourne Institute Index of House Price Expectations. This Index is now 15.9% below its level of a year ago.”