Confidence dips but holding up

Photo / Hawkes Bay Today

Consumer confidence has fallen over the past three months, the Westpac McDermott Miller survey found, but remains high enough to call the Reserve Bank's newfound gloom into question.

The index fell to 114 from 119 in June. Any number over 100 indicates more optimists than pessimists.

Westpac economist Donna Purdue said the survey challenged the Reserve Bank's belief - central to the very dovish forecasts it released on Thursday - that a long-lasting shift in households' behaviour is under way towards spending less and saving more or paying down debt.

"Yes, confidence has fallen, but at current levels the index remains above the long-run average of 111 and is broadly consistent with annual average growth in real consumer spending of around 3 per cent."

The Reserve Bank's September monetary policy statement forecasts private consumption growth to drop to just 0.5 per cent over the year to March 2012 and pick up only to 1 per cent the year after.

It expects consumption to grow more slowly than the economy over the next three years.

Governor Alan Bollard cited confidence as the main impediment to recovery when he appeared before Parliament's finance and expenditure committee on Thursday.

But Purdue said the level of the consumer confidence index suggested people were still willing to spend. It was the ability to do so that was hampered by weak income growth. As income growth improved, consumer spending would pick up to match it.

Westpac is surprised consumer sentiment did not take more of a hit in light of the weakness of the housing and labour markets, the collapse of South Canterbury Finance and the earthquake, which struck a third of the way into the survey period.

The survey recorded a rise in confidence among respondents in Canterbury. Westpac puts that counter-intuitive result down to the fact that only those who were physically able to respond (that is, could get into their homes to answer the phone) and willing to respond (that is, were less traumatised or affected), did so.

If Canterbury responses are excluded, the index drops six points instead of five, to 113.

Among the survey's component questions, the biggest decline was in expectations about the short-term economic outlook, with a net 3 per cent expecting bad times over the next 12 months, when three months ago a net 16 per cent expected an improvement.

But they are upbeat about the five-year outlook, with a net 55 per cent expecting good times.