Could it be that consumers finally are starting to come out of their shells?

It may have taken 125 basis points worth of cuts to official interest rates in the past six months and some $1.9 billion of federal government handouts linked to the carbon tax compensation to nudge things along.

But it could prove to be some much-needed good news for retailers if this week's 3.7 per cent jump in consumer confidence translates into spending, especially after seeing iconic outlet Darrell Lea hit a rocky road this week.

However, before we get too carried away, the Westpac-Melbourne Institute's monthly index of consumer sentiment at 99.1 in July, and below the crucial 100-point level, indicates pessimists still just outweighed optimists.

Westpac chief economist Bill Evans believes households probably were buoyed in the past month by the result of the Greek elections and the initial positive reception to the latest European leaders summit, which have at least averted a major meltdown on the eurozone for now.

A separate survey this week from Essential Research indicated how much we are fretting over the European situation.

Its online poll found that more than half of respondents (54 per cent) have either heard "a lot" or "a fair amount" about the European crisis, and 29 per cent said they had heard "a little".

The 13 per cent who said they had heard "almost nothing" must have been curled up in a darkened room since the global financial crisis.

Fourteen per cent expect Europe's woes will have a "major impact" on the Australian economy, 60 per cent thought there would be "some impact" and 16 per cent said it would have only a "small impact".

Just three per cent said, somewhat optimistically, there would be "no impact".

Europe aside, the rise in consumer confidence came despite the Reserve Bank of Australia (RBA) leaving the cash rate unchanged at this month's board meeting, and after 75 basis points worth of cuts in the previous two months, along with two reductions late last year.

Notably, confidence among respondents to the Westpac-Melbourne Institute survey who have a mortgage jumped by 5.5 per cent.

Mr Evans also pointed to a seven per cent fall in petrol prices in the past month, a near three per cent rise in the sharemarket, and a rally in the Australian dollar from 98 to 102 US cents - all usually positive factors for sentiment.

However, while consumers may be seeing light at the end of the tunnel, businesses remain glum.

The latest National Australia Bank business survey for June, also released this week, showed confidence sliding to a 10-month low.

While the timing of the report would have taken into account the interest rate cuts, it would not have captured the positive developments in Europe, and there was probably some uncertainty ahead of the introduction of the federal government's mining and carbon taxes on July 1.

Commonwealth Securities economist Savanth Sebastian believes if you had to make a choice between the two confidence surveys, the improvement in consumer sentiment is just what the doctor - or in this case the RBA - would have ordered.

"The reason being that a pickup in consumer confidence is a leading indicator, resulting in improving activity levels and eventually boosting business activity, trading conditions and overall business sentiment," he said.

But despite this apparent positive mood, consumers do appear to be fretting about the inflation outlook, which the Melbourne Institute believes is probably linked to perceptions surrounding the impact of the carbon price.

The institute's monthly survey of consumers' inflationary expectations jumped to 3.3 per cent in July from 2.3 per cent in June, and above the the RBA's two to three per cent inflation target range.

Rising price expectations can themselves lead to inflationary pressures as workers demand higher wages as compensation.

However, Treasury has forecast the price impact from the carbon price will add 0.7 per cent to the consumer price index (CPI), while the RBA has said it will look through this initial price impact when contemplating interest rates, as it did with the introduction of the GST in 2000.

In any case, this price impact comes when inflation is at an extremely low base.

According to the central bank's most recent forecasts in May, the annual CPI should have been just 1.25 per cent at the end of the June quarter, and underlying inflation at two per cent.

That would compare with 1.6 per cent and 2.15 per cent respectively as of the March quarter.

The actual inflation results for the June quarter will be released on July 25.

If the central bank's estimates are correct, it could lead to another interest rate cut in August, which may give consumers another gee-up.

Share This Page: