Does it get better from here?

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Does it get better from here?

September 20, 2013 / By Jenny Dong

For most of this year, businesses and investors have attributed the subdued retail environment and volatile consumer confidence levels at least partly to the uncertainty surrounding a looming Federal election and the uncertainty associated with a minority government in Canberra.

If this is correct, now that the Australian Federal election has been held (7th September) and a new Liberal/National Party coalition (the Coalition) has assumed power, consumer and business sentiment should therefore improve. The Westpac-Melbourne Institute Index of Consumer Sentiment (the Index) showed an increase of 4.7% in September, from 105.7 in August to 110.6, the highest reading since December 2010. A number above 100 means that there are more optimists than pessimists. Of course, many other factors can also influence consumer sentiment such as interest rates, household wealth, income and employment growth, economic conditions and global risks and uncertainties.

Looking back through history, Federal elections have often been held when sentiment levels have been at, or near, peak levels (see chart below). On these occasions, sentiment began to decline immediately or soon after the election. At least part of the explanation for this is that governments try to call elections to coincide with periods of consumer (and voter) confidence.

A major event like a Federal election may have an impact on confidence levels. However, history suggests that the effect is seldom prolonged. The last time the Coalition returned to government after a period in opposition was March 1996. Sentiment improved immediately following the election. The Index rose by 6.5% in March 1996 to 115.0, before declining by an average of 1.7% in the six months following. Similarly, national retail turnover increased by 0.7% (Australian Bureau of Statistics) in the month immediately after the March 1996 election, and then slowed over the next six months, mirroring the trend in consumer sentiment.

The recent election may have provided a boost to consumer confidence for now, but the challenges lie in the months ahead. Despite the current low interest rate environment following a number of rate cuts in the past two years, consumers continue to display a degree of caution in their spending behaviour. Retail trading has not seen much improvement over the past year, despite consumer sentiment being in positive territory for ten out of the past 11 months. Domestic retailers are also facing competition from the arrival of new international retail giants, such as Zara, H&M and Uniqlo, as well as leakage of spending into offshore online retailing.

With the Federal election now finally over, retailers and landlords are hoping that any uplift in sentiment will translate into higher retail spending, especially leading up to the Christmas period. But the chart suggests that a clear election outcome is only one step along the road to a recovery in retail spending.