Consumer confidence wavers

Early signs of wavering consumer confidence have begun to emerge, even though optimism remains near record highs, the latest Westpac McDermott Miller consumer confidence survey shows.

The survey's confidence index slipped back from a record 130.2 in December to 126.7 this month. Any number over 100 indicates more optimists than pessimists.

Westpac chief economist Brendan O'Donovan said consumers still had plenty to be happy about. "Job security is high, the housing market appears to have gained a second wind, the high dollar has seen retailers offer bargain deals on imported goods and Fonterra has announced a further increase in this season's dairy payout."

The question that has kept confidence buoyant is whether consumers think it is a good time to buy a big-ticket item.

McDermott Miller managing director Richard Miller said positive responses to that question were at record highs.

"High-income consumers see the high dollar reducing the price of imported goods, while other consumers hope to enjoy the benefit of discounted prices. Neither group expects this happy situation to last."

Confidence has eroded on other fronts, although it remains high. Fewer people say they are better off than they were a year ago and fewer expect to be better off next year.

Confidence about the economic outlook in a year's time, and in five years, has slipped as well, but mainly for people in the high- and middle-income brackets. Those on lower incomes are feeling better-off financially and are more optimistic about the outlook.

"Good job security tends to be more important for low-income earners and [there is] the prospect of higher wages because of the tightness of the labour market," O'Donovan said.

"For those on higher incomes, it's what is happening in asset markets that tends to be more important. So the potential softening of investment property prices and talk about the sharemarket's strongest gains being behind it are having an impact."

Westpac expects economic activity to hold up until the middle of the year, when the combination of lower net immigration, higher interest rates and weaker growth in house prices will start to take its toll.

O'Donovan said what happened to the housing market was critical. "Consumer spending will remain pretty solid until people see a housing slowdown."

Westpac estimates the "wealth effect" - homeowners' willingness to borrow and spend a few cents of every dollar increase in the value of their house - boosted consumer spending by about $2.7 billion last year.

But households could not indefinitely continue spending more than their income.

O'Donovan said consumer confidence was inherently fragile - he cited a recent sharp fall in confidence in Australia triggered by a downturn in the housing market, soft economic data and a rise in interest rates.

The local survey, undertaken in the first half of the month, would not have fully captured the effects of the Reserve Bank's latest interest-rate rise on March 10.

And because of the prevalence of fixed-rate mortgages, only about half of the impact of the Reserve Bank's six interest-rate hikes last year has yet been felt by borrowers.

Auckland and Wellington were the most optimistic regions, with sentiment only slightly softer than in December. By contrast, confidence in Waikato, the Bay of Plenty, East Coast and Southland declined markedly.

That might reflect nervousness about the high dollar, but is at odds with the fact that the housing market has softened slightly in the cities, while rural incomes have been boosted by high export prices for dairy products and meat.