According to the Westpac–Melbourne Institute, the Consumer Sentiment Index rose to 92.1 in January, marking a 2.6% increase over the last quarter and a significant 13.8% increase from the same period last year.
"Sentiment remains cautiously pessimistic overall but has improved markedly on a year ago,” said Luci Ellis (pictured above), chief economist at Westpac Group.
The recent uplift in consumer confidence has been primarily influenced by two significant factors: the implementation of stage 3 tax cuts and a decrease in inflation, which has reduced fears of further interest rate hikes.
This has led to more positive expectations among consumers regarding their financial situations and the broader economy.
Despite the overall improvement, consumers continue to exhibit high levels of risk aversion, consistent with trends observed since mid-2024.
The Westpac Risk Aversion Index slightly increased to 49 in December, indicating a stable but cautious approach to financial decisions.
Most consumers prefer safer investments like bank deposits or paying down debt.
Ellis pointed out a significant correlation between the Consumer Sentiment Index and actual spending patterns, suggesting a gradual improvement in consumer spending could be on the horizon.
“CSI±, a modified indicator that correlates well with per capita spending, has risen a further 4.3% since October,” she said, indicating a slow but steady recovery in spending.
The housing sector continues to recover, with home buyer sentiment experiencing a robust rebound from historical lows. However, the Consumer House Price Expectations Index indicated a cooling in house price expectations, aligning more closely with the actual slowing in house price growth.
Consumers’ concerns about unemployment have eased, with the Westpac–Melbourne Institute Unemployment Expectations Index showing improvement, reflecting confidence in the labor market's stability. This positive outlook is expected to continue through 2025.
As 2025 progresses, consumer attitudes towards major purchases are improving, suggesting that the worst may be over regarding economic pessimism. The stage is set for potential policy easing by the RBA, which could further boost consumer confidence and spending.
Ellis remains cautiously optimistic, anticipating that recent fiscal policies and inflation trends will sustain a positive trajectory in consumer sentiment.
Access the Westpac report in full here.
