Cheaper petrol boosts confidence

Lower petrol prices have helped push consumer confidence to its highest level for a year, according to the Westpac McDermott Miller quarterly survey.

But at an index reading of 111.7 this month, up from 106 in June, it is still a touch below the long-term average for the survey. Anything above 100 indicates more optimists than pessimists.

"The dramatic fall in petrol prices in recent weeks has provided a welcome windfall for consumers," said Westpac economist Donna Purdue.

"Faced with a multitude of cost increases over the past year including rising debt servicing, higher electricity prices and increased local government rates, it is little wonder consumers have taken heart from the drop in petrol prices."

The increased tax credits for working families and the resilient housing and labour markets were likely to have contributed to the improvement too, she said.

Westpac expects the housing and labour markets to eventually turn into a drag on confidence and consumer spending.

But in the meantime, for a Reserve Bank already nervous about the apparent lack of a slowdown in consumer spending, the revival of confidence was only likely to add to the risk of an interest rate hike in the near future, Purdue said.

The improvement was strongest in provincial cities and among people in their 30s and 40s. It was stronger in the South Island than the North and among women than men.

The confidence index reflects respondents' answers to questions about whether they feel better or worse off financially, whether they expect better or worse times ahead for the economy and whether they think it is a good or bad time to buy a major household item.

The main driver of the September quarter's lift in confidence was improved expectations about the next 12 months.

But, on balance, consumers expect conditions to deteriorate, with a net 5 per cent expecting bad economic times over the year ahead, compared with a net 19 per cent pessimistic three months ago.

And their view of the economy five years from now remains close to all-time lows, though more are optimistic than not, by a net 22 per cent.

Only a net 0.5 per cent said they were personally worse off than a year ago, compared with a net 5 per cent in the June survey.

"This may seem a relatively subdued response to the fall in petrol prices," Purdue said, "but responses to this question are generally negative. The long-run average is 8 per cent saying they are worse off."

Consumers' views of their prospects in a year's time lifted only slightly, with a net 12 per cent expecting to be better off compared with 10 per cent in June.

"It seem neither the fall in petrol prices nor the surprisingly strong job creation in the second quarter of 2006 have translated into lasting perceptions of financial security," Purdue said.

A net 29 per cent thought it a good time to buy a big-ticket item, up from a net 22 per cent in June. But that is still well down the highs reached 18 months ago when a net 50 per cent judged it a good time to buy.