Has consumer confidence turned the corner? Economy roundup

Consumer confidence has been in a nosedive for much of this year, but a new survey released today suggests they may be thinking of re-opening their wallets.

The Westpac-Melbourne Institute Consumer Sentiment index rose by 2.7 points in May, the first upward movement in the index since December last year.

According to Westpac chief economist Bill Evans, however, the reversal may be a short-term response to personal income tax cuts announced in the budget earlier this month.

And, he cautions, even with the slight May rise, at 89.8 the index remains only slightly above the 15-year lows recorded last month.

“While the April read was the lowest since June 1993, the reading in May is only slightly higher and is still indicating a depressed consumer,” Evans says.

Shoppers reported a much more positive attitude to shopping conditions in May, up 18.4% on last month but still 40.2% below this time last year.

The economic news was more unambiguously bad from the motor vehicle and housing sectors today, with both reporting declining conditions.

Higher interest rates pushed the Housing Industry Association-Commonwealth Bank First Home Buyer Affordability index 3.5% lower in the March 2008 quarter, which is now 10% below its level this time last year.

The monthly loan repayment needed on a typical first-home mortgage rose from $2681 to $2799, up 4.4%, while the proportion of average first home buyer income required for mortgage repayments lifted 1%.

And new car sales dropped 0.8% in seasonally adjusted terms in April, with 89,255 vehicles being sold in the month.

A fall in purchases of passenger vehicles and sports utility vehicles were key reasons behind the drop, with consumers buying 1.9% less and 1.7% less of those vehicles respectively.

All in all, a rather fascinating mix of signals for the Reserve Bank to consider in its deliberations on whether a further interest rise is required.

As Westpac’s Bill Evan says: “Interest rates are currently poised on a knife edge.” Each sign of concrete weakness is another step away from the precipice, but if tax cuts cause a lasting surge in consumer confidence another rise could be on the way.