Australia: Improved sentiment in 2018 driven by tax cuts & mining states – Westpac

Matthew Hassan, Senior Economist at Westpac, points out that the Westpac Melbourne Institute Index of Consumer Sentiment has improved noticeably in 2018, rising to a July level that is the most positive since Nov 2013.

Key Quotes

“While at 106.1 the overall level of sentiment is still not strong, two factors have made a clear contribution to the lift.”

“The first, and most obvious, is the tax cut measures announced in the May Federal Budget, with the first round of measures coming into effect on July 1. With the initial impact on household cash flows negligible, the main effect on sentiment has been via a boost to expectations: the ‘finances, next 12mths’ sub-index has surged 5.5% since Aprils with solid gains for the ‘economy, next 12mths’ (+4.4%) and ‘economy, next 5yrs’ (+4.9%) sub-indexes as well, the latter now up an impressive 20%yr.”

“The two ‘economic outlook’ sub-indexes are now well above their long run averages. The two ‘finances’ sub-indexes remain slightly below average however, suggesting consumer budgets are still under pressure.”

“The sub-group detail shows particularly strong gains amongst households with incomes in the $40-80k range in Jun-Jul – the ‘middle income’ households that benefit most from initial tax changes. Sentiment amongst high income households – the group set to benefit most from the tax package beyond 2025 – also surged strongly over the last 3mths.”

“A second factor behind the improvement over the last year is the more balanced growth profile across states as conditions have stabilised in the mining states.”

“Sentiment is still understandably stronger across the non-mining states, but the gap has closed considerably compared to 2015-17.”