Westpac sees confidence rise boosting consumer spending

(Update adds comments from ASB economist Jane Turner, interactive chart below)

Consumer confidence improved in the June quarter, according to the Westpac McDermott Miller Consumer Confidence Index, reaching its second highest level in the past three and a half years.

Westpac Senior Economist Donna Purdue said the rebound in confidence was great news for the economy, suggesting a pick up in consumer spending.

"Consumer spending has been a notable weak spot in the economic recovery so far this year," Purdue said.

"However, with confidence at current levels, we expect that situation will prove temporary.”

The Westpac McDermott Miller Consumer Confidence Index rose 4.6 points quarter-on-quarter to 119.3 in June and is 13.3 points higher than this time last year. The long-term average is 111.6. An index number over one hundred indicates more optimists than pessimists and vice versa.

Purdue said while the confidence improvement was fairly broad based, the most influential factor was a sharp improvement in consumers’ perceptions of their current purchasing power.

“A net 31% of respondents say that now is a good time to buy a major household item, up 10 points from the March quarter and the highest reading for this component since the September 2005 quarter,” said Purdue.

“The upcoming increase in GST on 1 October is likely to be a key factor supporting consumer’s responses, with households widely expected to bring forward purchases of big-ticket items.”

Consumers were much less despondent about their personal financial situations with a net 14% of respondents saying they were worse off than a year ago, compared to a net 22% last quarter.

“This is the least pessimism respondents have shown toward their current financial position in 2½ years and, combined with consumers’ continued optimism about their finances in the coming year, bodes well for stronger and more broad based spending ahead.”

Purdue did note that at least part of the confidence improvement in the quarter could be attributed to tax changes announced in May's Budget.

"Nevertheless, at face value, the high level of confidence points to stronger consumer spending in the period ahead, and importantly, stronger spending than anticipated by the RBNZ in their June Monetary Policy Statement."

ASB economist Jane Turner said the Budget seemed largely responsible for the consumer confidence lift. 

"On net, households expect the total effect of tax changes to be positive," Turner noted. 

"In addition, the survey suggests some willingness to bring forward purchases of big-ticket items ahead of the October 1 tax boost.  We are expecting a pick up in retail spending over Q3 ahead of the increase in GST.  However, much of this increase is likely to be unwound in the subsequent quarter." 

 "On a more general basis, we expect the improvement in the labour market and eventual pick up in wage growth will support consumer confidence over the next year," Turner added.