Confidence riddle

There is some seriously good news on the economy going around right now.

In Australia, inflation remains reasonably well contained at present, and the timing for the next rate hike looks more likely to fall into the second half of the year. The labour market is strong, business confidence is good and even consumer confidence is bouncing back after the floods.

Today’s consumer sentiment data shows confidence was up modestly in February, but I reckon this is actually a pretty good result. The flood disaster knocked confidence around quite badly in January, and it might take a few months before things start looking up, particularly in affected areas.

There is even some good news in the United States. The sharemarket is at a two-year high, small business confidence is on the increase and large companies are also upbeat. The unemployment situation remains ugly, but there is at least some light at the end of the tunnel.

Our economy is well placed for the next 12 months and beyond. The global economy is recovering, if slowly.

So why won’t those damn households start spending again and get the cash flowing around the business community?

Westpac’s chief economist Bill Evans has highlighted the conundrum today by examining a question in the consumer sentiment report which asks householders whether this is a good or bad time to buy a major household item – something like a fridge or a nice big plasma TV.

Evans says that over the last six months this component of the Index has averaged 141.5 points, which is around 25-year highs.

And yet as Gerry Harvey will tell you, sales of household goods have been pretty poor during that period – despite attractive discounts.

Evans says households have seen the discounts, but their conservative mindset is so ingrained that they just won’t open their wallets.

“In effect households are saying that because of low prices now is a good time to buy but due to caution surrounding the economic outlook, prospects for their finances and uncomfortably high debt they are not buying despite attractive prices.”

That’s not good. It suggests discounts are no longer having much impression on consumers and would lead many entrepreneurs to ask: What else can we do?

It’s a hard question to answer. A period without interest rates rises might help bring consumers out of their shells, and a few months without a natural disaster would be good too.

Customer services levels will need to stay high and every effort will need to be made to encourage repeat business.

But above all else, patience and perseverance will be crucial.