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Business and consumer sentiment improvement

PUBLISHED

2023-07-13

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Consumer sentiment in Australia showed a modest improvement in July, according to the Westpac-Melbourne Institute survey.

While still near recessionary lows, the survey indicated a 2.7% increase in consumer sentiment compared to the previous month.

Although views on current conditions deteriorated slightly, forward expectations for both individual family finances and the broader economy improved. Labour market and housing sentiment also experienced modest improvements.

Similarly, business confidence, as measured by the NAB Survey, showed signs of improvement in June, albeit remaining below its long-run average. Views on current conditions remained relatively unchanged, although they were at their lowest levels since January 2022.

However, they still exceeded long-run averages. Notably, labour cost pressures recorded a significant increase during the month, while final pricing intentions remained relatively stable. The retail sector, however, displayed notable weakness in both business conditions and confidence.

The overall improvement in sentiment aligns with the anticipation and eventual implementation of another Reserve Bank of Australia (RBA) rate pause at its July meeting.

However, the magnitude of these sentiment shifts is smaller compared to the initial rate pause in April, indicating that businesses and households now hold more conviction that rate hikes are not yet complete. This sentiment supports the view that conditions are gradually easing and downward momentum in pricing is showing signs of slowing.

Morgan Stanley analysts maintain the expectation of two additional rate hikes from the RBA, anticipated in August and September. The surveys' findings reinforce this outlook, suggesting that the easing in economic conditions remains gradual. The improved sentiment indicates a growing confidence in the resilience of the Australian economy, further supporting the notion that the rate hikes are necessary for sustainable growth.

While challenges and uncertainties persist, the gradual improvement in both consumer and business sentiment provides a positive sign for Australia's economic recovery. The upcoming rate hikes are expected to play a crucial role in balancing economic conditions and fostering long-term stability.

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