Australia: Will business and consumer sentiment converge? - ANZ

The research team at ANZ explains that one of the interesting contrasts in the Australian economic data is that between the strength of business sentiment and the weakness in consumer confidence and while the two are typically correlated, the current divergence is not unprecedented – though it is approaching the lower end of the range. 

Key Quotes

“Given they are useful leading indicators, is there anything we can say about how gaps between the two are typically closed? For instance, is it the case that business conditions usually drop towards consumer sentiment when the latter is much lower than the former? If it is, then the current low level of consumer confidence implies a sharp weakening in business conditions in coming months. This would challenge our expectation of a gradual improvement in the labour market.”

“For the most part, when consumer confidence is low it appears to rise toward business conditions, rather than the other way around. We think the usual dominance of business conditions over consumer confidence reflects the link between business conditions and the labour market. If businesses are in an optimistic mood then that usually flows through to the labour market, which in turn will likely boost consumer sentiment if it is low. We think this pattern is likely to play out over the next few months, with a better performing labour market leading to a stabilisation followed by recovery in consumer sentiment.”

“Employment was up strongly in April, following on from the very strong result for March. The drop in the unemployment rate to 5.7% confirms for us the overall strength of the report. Given the strength of labour market indicators from sources such as business confidence and ANZ Job Ads, we are not overly surprised by the strength of the April jobs report, even though it was above our forecast. Indeed, a weak result would have been a bigger surprise given the signal coming from the other labour market indicators. We think there is a good chance we are in the midst of a period of ‘catch-up’ after a period of excessive weakness in the official data.”