It’s official: consumer confidence has rebounded, reaching 2-year high

Consumer confidence rose 2.0% in March, marking the third consecutive rise and fifth month running where the number of optimists outweighed the number of pessimists.

Westpac-Melbourne Institute’s ‘Index of Consumer Sentiment’ has hit 110.5, on a scale where 100 represents a neutral point and scores above indicate positive sentiment. The rise follows a stellar 7.7% jump in February.

Westpac’s chief economist, Bill Evans, says the result represents the highest level of the Index since December 2010 and a jump of 15.1% over the last year.

That follows a period of 16 months when the Index was below 100 on 14 of those 16 months.

“Despite the Reserve Bank reducing its cash rate by 175 [basis points] between November 2011 and December 2012 the Index averaged a modest 98 over the course of 2012,” Evans adds, pointing to the unresponsiveness of the measure to rate cuts.

“However, in recent months we have seen the accumulation of the cuts appearing to be genuinely boosting confidence. Equity markets and the associated signals that global economic prospects are improving are the other key driver of this improved confidence.”

The sharemarket continued its strong start to the year over the past few weeks, rising a further 3% between the February and March surveys to be up 10% for the year and 20% from its September low.

Respondents to the survey, conducted between 4 March and 10 March, were most likely to recall news around ‘domestic economic conditions’, ‘budget and taxation’, ‘interest rates’, ‘international conditions’ and ‘employment’.

Solid increase in perceptions of family finances drove the improvement in March. The sub-index tracking views on ‘family finances versus a year ago’ increased by 3.9%, while perceptions of ‘family finances over the next 12 months’ rose by 3.1%.

There were also improvements in the economic outlook with the sub-indexes tracking views on ‘economic conditions over the next 12 months’ up 0.8% and ‘economic conditions over the next 5 years’ up 0.8%.

Since December the ‘time to buy a dwelling’ Index increased by 1.6% from 142.2 in December to 144.5 in March. This Index is now up by 19.6% over the last 12 months. In contrast, opinions on ‘whether now is a good time to buy a major household item’ cooled, with this sub-index down 1.6%.

Despite higher confidence and strong market performance households remain watchful of their savings, Evans cautions. “In December 39.8% of respondents favoured bank deposits or other fixed interest investment s as the ‘wisest place for savings’. That proportion increased to 41.3% in March.

The Reserve Bank Board next meets on 2 April. Westpac does not expect a cash rate cut to come at that meeting, but forecasts more cuts later in the year.