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  • Writer's pictureCrest Economics

Australian consumer confidence to a 10 year high- March 2021

Australia's success in containing COVID-19 with promised vaccines and ongoing support from expansionary government policies have all contributed to a surge in consumer sentiment. Driven by improving economic conditions, both domestically and abroad, the Westpac-Melbourne Institute Index of Consumer Sentiment rose from 109.1 in February to 111.8 in March.

From Westpac's consumer survey, 57% of respondents assessed news on 'economic conditions' as being favorable (up from 47% in Dec); 51% assessed 'employment conditions' as favourable (up from 33% in Dec). However, there was a marginal deterioration around 'budget/tax policy' with 48% seeing this as favourable (down from 57% in Dec).

Key components of economic growth such as household consumption, business investment and dwelling construction have all improved over the December quarter, anticipating strong momentum going into 2021 with the Australian economy expected to expand by 4.5% in 2021, revised from 4.0% previously. Household consumption lifted by 4.3% in the December quarter, private investment rose by 3.9% and dwelling investment jumped by 4%.

Tensions are emerging in the housing market due to the squeeze on affordability from rising prices. Despite higher optimism around house prices, the ‘time to buy a dwelling’ index slipped by 3.6%, reflecting the hesitancy around buying real estate as an investment option. House price expectations are forecasted to remain buoyant in NSW - up 6.4% to 161.6, Queensland - up 5.7% in 162 and WA - up 4.6% to 161.8. However, the apparent optimism around house prices evidently contrasts to the low sentiment towards ‘real estate’ as an investment option.

The Reserve Bank Board next meets on April 6 and will be unlikely to make any changes to its current policy settings. Sustained high confidence levels in the community and ongoing enthusiasm are reassuring indicators of Australia's economic recovery. Whilst fears of asset bubbles are brewing, RBA Governor has noted that ‘Investor and business credit growth remain weak’. In the case that the economy begins to overheat, the likely policy response will be to impose regulations on bank lending rather than to increase interest rates.

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