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Business Confidence Up - Consumer Confidence Down

The Australian economy has been going through an interesting phase lately, with consumer confidence continuing to struggle amidst growing long-term business sentiment. Despite recording a bump in September, the Westpac-Melbourne Institute Consumer Sentiment Index has been firmly in the pessimistic zone for the best part of three years. In contrast, the NAB business confidence and conditions survey in August continues to highlight strong business conditions despite a recent drop in business confidence.

The Westpac-Melbourne Institute Consumer Sentiment Index increased by 2.5 percent on a monthly basis in September, jumping from 95.5 to 97.9 following a 1.2 percent drop a month earlier. While family finances soared 6.1 percent compared to a year ago and expectations for the economic outlook over the next 12 months and five years went up by 2.7 percent and 5.1 percent respectively, the reading was still 3.4 percent lower than it was in September 2016 as pessimists continue to outnumber optimists.

In contrast, business conditions continued their solid run in August according to the NAB Business Confidence and Conditions survey, although business confidence took somewhat of a hit. Business conditions increased by 1 point to reach its highest level since early 2008, with most industries other than retail performing well and economic data largely upbeat. While business confidence dropped sharply to slightly below the long-run average during August, this deterioration is against the long-term trend and may prove to be short lived. The business confidence index dropped by 7 points in August to +5 index points, the first time it has fallen below the long-run average since mid-2016.

According to Mr Alan Oster, NAB’s Chief economist, “It is probably too early to read much into the drop in confidence this month. While external shocks, such as the escalating tensions with North Korea, may have had some impact, we have actually asked for the first time in the Survey what firms see as being the most influential factors impacting confidence. For those indicating deterioration in confidence, the biggest concerns appear to be customer demand, government policy, as well as cost pressures – both energy and wages”. Business sales, profits, and investment intentions continue to increase, however, in contrast to stagnant disposable income and shrinking household savings.

Despite a bump in consumer sentiment this month, there is a long-term divergence between consumers and businesses in terms of how they see the country going forward. According to Gerard Minack from Minack Advisors, healthy business sales and profits are failing to translate into better employment and income figures for everyday Australians: "While it's not news that Australian business is more upbeat than consumers, what is new is the hint that corporates are acting on that sentiment... While an improvement in investment remains a forecast, not so for employment."  Relatively downbeat consumer confidence is a point of concern for businesses in light of poor retail conditions, with additional employment and income growth both needed before Australia will experience optimism across the board. 

Image source: JoemanjiArts/Shutterstock

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