Australians grow more upbeat about economy

SYDNEY: Australian consumer sentiment unexpectedly surged for the second straight month in July to reach its best level in 19 months, as households grew more optimistic about an economic recovery.

Adding to the positive mood, government data yesterday showed demand for home loans rising for the eight straight month as record low interest rates and generous government handouts drew more first home buyers to the property market.

The better-than-expected outcomes should reinforce the Reserve Bank of Australia’s (RBA) view that the local economy will recover later this year, and lessen the need for further cuts in the cash rate.

“This is unquestionably a stunning result,” said Bill Evans, chief economist at Westpac. “This print for the (Westpac Consumer) index will encourage even more optimism from the RBA.”

The survey of 1,200 people by the Westpac Bank and Melbourne Institute showed the index of consumer sentiment climbed 9.3% in July, the highest reading since December 2007. That was a real surprise to analysts who had expected a pullback after a steep 12.7% jump in June.

The index was now up 23.2% in two months, the biggest such increase since the survey began in 1975.

The improvement was led by consumer assessments of the economic outlook, especially after Australia dodged a “technical recession” in the first quarter and official data have shown the labour market holding up surprisingly well so far.

The measure of economic conditions over the next 12 months rose 19.6%, while that for conditions over the next five years jumped 15.7%.

“Today’s data show that the balance of risks facing the economy continues to shift towards a more positive outlook,” said Josh Williamson, economist at Citi.

That seemed to echo RBA’s own assessment on Tuesday. While keeping the cash rate unchanged at a record low of 3% for the third month, it said the domestic economy was not as weak as expected and sounded more upbeat about a global recovery.

It has slashed the cash rate by 450 basis points since September and retains a scope for lowering rates further. Investors expect another quarter percentage point rate cut in October, but the RBA could quickly reverse gears in the next 12 months, with markets pricing in 50 basis points of rate hikes.

Despite the upbeat data yesterday, there are sizeable downside risks to the economy in coming months.

Household spending is likely to take a hit in the second half of the year as the effect of the government’s cash handouts fades and export earnings drop, reflecting lower commodity prices. Additionally, the global recession has seen businesses cut back on investment and led to mounting fears of job losses. — Reuters

Official labour data for June is due out today and analysts are looking for a drop of 25,000 jobs, after a 1,700 drop in May. The jobless rate is seen rising to 5.9%, a six-year high.

“The real test for the consumer will be in the second half of the year, when the impact of the fiscal stimulus abates,” said Helen Kevans, economist at JP Morgan. “Then, households’ disposable incomes will be squeezed by falling labour income as unemployment rises, and rising petrol prices.”

The government forecasts the jobless rate to top 8.5% by mid-2011 and that will keep pressure on the RBA to maintain an easy monetary policy bias. Historically, it has rarely tightened policy when the jobless rate has been rising.

The relief from aggressive rate cuts was clear in the continuing recovery in demand for housing loans. Official data showed the number of home loans rose by a better-than-expected 2.2% in May, from a month earlier.

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