The Westpac–Melbourne Institute Consumer Sentiment Index increased by 3.7 per cent in August to 113.4 from 109.4 in July.
 
Westpac senior economist, Matthew Hassan said the rise extends what had already been an extraordinary rally in confidence over the previous two months.
 
“The index is now up 27.8 per cent since May, the biggest three month gain since the survey began in 1975, and by a wide margin. Indeed, the only comparable surges in sentiment were seen coming out of the recessions of the early 80s (+22.8 per cent) and the early 90s (+20.3 per cent) – and both of these rallies still left sentiment in pessimistic territory overall, with the index below 100.
 
“The current surge by contrast has seen sentiment rise back into solidly optimistic territory. The Index is now up a staggering 43.6 per cent from its 2008 low, to its highest level in nearly two years. Remarkably, sentiment is now just 1.6 per cent below its 2007 average.”
 
There were two key economic developments that lifted the consumer mood in August. Official ABS figures showing house prices rose 4.2 per cent in the June quarter. The gain meant prices have now recovered most of the ground lost since the start of last year and would have gone a long way towards dispelling any lingering concerns that local housing markets could be headed for the sort of double-digit declines seen abroad.
 
The other major positive was the strong July labour market result, which showed an unexpected rise in employment and the unemployment rate stabilising at 5.8 per cent.
 
There were other positives as well including the ASX jumped 12 per cent between the June and July surveys to be up 37 per cent from mid-March lows; petrol prices edged 1.2 per cent lower, and the Australian dollar climbed over four US cents. The news from offshore has also been more promising with further evidence that the global economy is starting to stabilise.
 
The only demographic groups recording a decline in sentiment were 18-24 year olds, tenants, and 20k to 40k pa income earners. Rising house prices may again be widening the wedge between sentiment of those that own a home and those that do not.
 
The component index measuring responses to ‘whether now is a good time to buy major household items’ – which research has shown is a particularly good guide to spending – continues to give encouraging signs for retailers. The index rose another 2.2 per cent in July and is back at its highest levels since mid-2007, when retail sales were rising at a six per cent annualised pace
 
“The continued rally in consumer confidence in August underscores the resilience of consumer demand domestically. The economy still has to negotiate a ‘soft-patch’ near term as policy boosters drop out. Nevertheless we expect the Reserve Bank to begin the cautious process of ‘normalising’ rates in early 2010 with a 25bp increase in February,” said Hassan.