Consumer Sentiment soars as economy ‘escapes’ recession

Written on the 10th of June 2009

The Westpac–Melbourne Institute Index of Consumer Sentiment rose by 12.7% in June from 88.8 in May to 100.1 in June.

Westpac Chief Economist, Bill Evans, commented, "This is a truly remarkable result. It is the second largest recorded increase in the Index since the survey began in 1974 and the
largest increase in the last 22 years.

“It is very likely that the dominant factor behind this extraordinary rise was the release of the March quarter national accounts last Wednesday which registered a small but
nevertheless positive growth rate for the Australian economy in the March quarter following the contraction in the economy in the December quarter. That result was widely
hailed in the media as indicating that Australia had avoided a recession (defined as two consecutive quarters of negative growth).

“From the consumer's perspective that was extremely encouraging news since they had already benefited from a 385 bp cut in the variable mortgage rate; and around $14 bn of direct government transfers with another $5bn to come. The unemployment rate had actually fallen in April to 5.4% so on the assumption that Australia had avoided a recession and the worst had passed, consumers have become much more confident.

“The significance of the word "recession" to consumers was previously highlighted in March 2001 when the Index fell by 13.2% following the release of the December quarter
2000 national accounts which showed negative growth and was hailed in the media as portending a recession. The Index snapped back with an 11.6% jump when March quarter
data showed the economy rebounding.

“Other factors would also have contributed to this stunning result. Driven by the consistent improvement in financial assets particularly global share markets (Australia's market is up
by 26% since the March low and 5% since the last Survey) Consumer Sentiment has been on the rise in most of the major economies. The latest reading from the US showed a 5.5%
increase – taking the gains from the low in February to 22%.

“The Index is now at its highest level since January 2008 when the unemployment rate was 4.3% and the economy was growing at a 4% pace."