economic update
By David Marshall, Chief Financial Officer

The Reserve Bank of Australia believes there is enough monetary and budgetary stimulus already in the pipeline to support demand, while the downside risks to the outlook have been lessened - the RBA acknowledging that some indicators had been stronger than expected, while the global economy is stabilising and financial market conditions have continued to improve.

National Australia Bank has expressed the view that the RBA may be underestimating the coming rise in unemployment.

The Westpac-Melbourne Institute leading index for April rose for the second month in a row in April, pointing to a receding recession. Buoyed from rising share markets and increased demand for housing, the leading index rose 0.7% in April after a 0.4% rise in March.

There appears to be broad agreement that confidence has held up much better in Australia than in the most other offshore domains. This was even more evident in the largest rise in consumer sentiment in June seen for 22 years.

But underneath this release from anxiety, consumers still harbour concerns about debt levels, about the job markets and their attitude to finance, and the combination of the traditional macro drivers of consumption will continue to weigh on consumer spending for the foreseeable future.

With employment rising, declining inflation will not be sufficient to lift real household spending. This is an environment where wealth effects, some debt reduction and maintaining a positive savings rate will continue to weigh on consumer spending at least for the next year or so. This is set to continue until the outlook is clarified, in terms of the job market, the economy and more certainty surrounding the outlook for household wealth.

Source: Australian Markets Weekly