Consumer confidence slips but still solid for Christmas spend up, Westpac says (Update 1)

Consumer confidence slipped slightly in the December quarter from the September quarter, but remained well above average and implied a solid pickup in spending over the Christmas period, Westpac said following the latest release of the Westpac McDermott Miller Consumer Confidence survey. (Update 1 includes ANZ-Roy Morgan survey results.) The consumer confidence index fell to 116.9 from 120.3 in September, but remained "firmly positive and well above the level of twelve months ago," McDermott Miller MD Richard Miller said. An index number over 100 indicates more optimists than pessimists, while a number under 100 indicates the opposite. "We expect confidence to translate into a better Christmas for retail than that experienced in 2008, and better than the outlook indicated only six months ago," Miller said. "News that the recession was near an end brought widespread euphoria last quarter, with confidence soaring to a four-year high," Westpac Senior Economist Donna Purdue said. "However, the past three months have seen consumers fine-tune their expectations of the future, and confidence has slipped as a result. Still, at these levels confidence remains well above average, and implies a solid pick up in spending over the Christmas period," Purdue said.

Most of the decline this quarter came from an adjustment to expectations of the medium term economic outlook and consumer's assessment of their year-ahead financial position. That saw the Future Conditions Index drop from 134.7 in September, to 128.8 currently. In contrast, consumer's assessment of present conditions was more resilient, with the Index remaining broadly unchanged in the quarter at 99.0. In terms of future conditions, a net 52% of respondents now expect good economic times over the next five years, down from the record net 63% in September. Meanwhile, a net 20% of consumers anticipate that the coming year will be more lucrative, compared to a net 24% in the September quarter. Optimism toward the short term economic outlook dropped from a net 17% to a net 14%. On current conditions, a net 21% of respondents said they are worse off financially now compared to a year ago, an improvement from a net 22% expecting to be worse off in September. A net 19% of respondents say now is a good time to buy major household items "“ broadly unchanged from September. "The huge gap that has opened up between present and future conditions over the past year has cast come doubt over how much the surge in confidence will translate into actual spending," said Mrs Purdue. A narrowing of the gap this quarter should help appease those concerns."

The ANZ-Roy Morgan Consumer Confidence measure fell a further 2.9 percentage points in December "“ the second successive monthly decline. However, the overall level of Consumer Confidence "“ 118.6 "“ remains high and well above the key 100 benchmark. Less optimistic expectations towards the future dragged aggregate consumer confidence down. Generally speaking, consumers remain optimistic about future prospects. A net 40 percent expect to be better off next year. A net 22 percent think we'll have good times financially. A net 42 percent expect good times during the next five years. However, they are down 4, 7 and 4 percentage points respectfully on November. This has seen the future conditions index fall from 140 to 134.6. Conversely, the current conditions component of the survey was broadly unchanged on last month. A net 22 percent still report as being worse off relative to this time last year. A net 11 percent think it is a good time to buy a major household item "“ up a percentage point on November. This saw the current conditions component lift marginally from 94.2 to 94.5. The level remains below the key 100 benchmark. The dichotomy between current and expected conditions continues to give a layer of uncertainty surrounding the pace of recovery. In the first instance we should not be surprised a gap exists. Improving fortunes always starts with rising expectations towards the future. However, it is the magnitude of the gap that continues to portend of divergences between expectations and reality. When asked where respondents thought inflation would reside on average over the next two years, the answer came back at 3.9 percent. At present, it is impossible to provide insightful comment on such a figure. One's immediate reaction is that it resides outside the top-end of the 1 to 3 percent RBNZ policy band. But around the globe there is an inherent upward bias in such surveys. Inflation expectations questions that are more short-term focused (say 1 or 2 years ahead), offer little in regard to inflation expectations per se, but can be used as barometers of wage bargaining behaviour, which are in themselves critical components of any monetary policy framework. This is a key area we will monitor going forward.