‘Chasm’ between weak consumers and booming businesses widens. How and when will it close?

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Australian households are feeling “deeply pessimistic”, but they are still spending money and business confidence keeps booming.

Economists say it is hard to ignore how differently households are feeling about economic conditions compared to businesses.

The latest NAB monthly business survey shows business confidence has picked up again, with businesses’ perceptions of conditions remaining well above their long-term average.

Trading conditions improved again last month and profitability and employment remained strong.

But that contrasted sharply with consumer sentiment, which remained in deeply pessimistic territory.

“The division reflects rising prices that must be paid by households for goods and services, and businesses which have been much more able to pass on higher input costs in recent months,” Citi economists explained.

Consumer sentiment remains near historic lows

Two new surveys released on Tuesday reveal how differently households and businesses are feeling about the economy.

The latest Westpac Melbourne Institute Index of Consumer Sentiment shows consumer confidence remains near historic lows.

It rose slightly last month, by 3.9 per cent, for the first time since November 2021, but economists say that may have just been statistical “noise”.

The survey was conducted in the same week as petrol prices fell by 11.2 cents a litre in capital cities, and as pension and welfare payments received their largest indexation boost in 12 years.

Economists say that slight up-tick in sentiment may be tested next month when the full rate of the petrol excise returns and the Reserve Bank lifts interest rates again.

They also wonder how much longer households will continue to spend money when they say they are feeling so pessimistic.

“We have only seen sentiment at these low levels in the past during recessions or major economic disturbances such as the COVID pandemic or the global financial crisis,” said Westpac chief economist Bill Evans.

“History … suggests confidence may be reaching something of a natural floor — a deeply pessimistic level but stopping short of the despair that can take hold when a deep recession causes widespread upheaval in labour markets.

“Confidence is only likely to see sustained gains once there is convincing evidence that the inflation threat is easing and the relentless rise in interest rates is nearing an end.”

Businesses are feeling even more confident

The other report, the NAB monthly business survey, shows businesses are feeling more confident and think trading conditions keep getting better.

Citi economists Josh Williamson and Faraz Syed said it shows employment conditions will remain very strong in coming months and that should see the unemployment rate fall even further.

“The small pick-up in consumer sentiment cannot hide the chasm between household perceptions of economic conditions and the much more positive view on the part of businesses,” they said.

“Household demand is running ahead of sentiment, showing households are effectively accepting higher prices for their purchases regardless of what they say in the consumer sentiment survey.

“For the Reserve Bank, the most important aspect of today’s business confidence data was resilience in employment conditions that supports ongoing strong employment and a very low unemployment rate.”

Westpac said the strength of the jobs market was all that was keeping consumer confidence above its lowest points during the severe recessions of the early 1980s and 1990s.

“The Westpac-Melbourne Institute Unemployment Expectations Index dipped below 100 again in September, meaning more consumers expect unemployment to fall rather than rise over the next 12 months,” Mr Evans noted.

“This compares to average reads around 160 when wider sentiment recorded extreme lows in the early 1980s and early 1990s recessions – current confidence around jobs is 60 per cent better than during those dark days.”

Citi’s analysts think the RBA will lift that cash rate target by another 0.25 percentage points in October, November and December.

That would see the cash rate ending the year on 3.1 per cent, up from 2.35 per cent currently.

Westpac sees another rate rise in February next year, which would take the cash rate to a peak of 3.35 per cent.

By business reporter Gareth Hutchens (Original ABC Article)