Is the outlook for the economy improving? Consumer sentiment still low but green shoots appearing

The Westpac-Melbourne Institute Consumer Sentiment Index has risen 2.7% from this time in November, to 82.1.

While this is still considered deeply pessimistic, it's also a 2.2% improvement from December '22, and suggests the RBA decision to keep the cash rate at 4.35% helped ease the concerns of Aussies already struggling with mortgage repayments.

RBA boss Michele Bullock has maintained further rate hikes could be necessary to keep lowering inflation, but other results from the index point to domestic price pressures moderating.

The 'Time to buy a major household item' index dropped 3.8% to just 78.2, in the bottom five all time reads from close to 600 months, going back to 1974.

This is a major indicator that Aussie households are further tightening the purse strings, which is further evidence the domestic demand Ms Bullock says is now the primary driver of inflation is softening.

It also shows there's little sign of inflation expectations becoming entrenched in the minds of the Australian public, which Ms Bullock says would involve interest rates going even higher, and a much larger increase in unemployment.

If people think inflation is inevitable in the future, spending can increase, with consumers rushing to buy goods before the price goes up, which in turn can cause hyperinflation.

This was also 6.7% lower than the same time last year, which might suggest inflation will drop more in the early months of 2024 than it did at the start of this year.

These figures follow the release of the national accounts for September, which showed weaker GDP growth than anticipated, and a continued per capita recession, which could have made Ms Bullock and the RBA more wary of the possibility of further rate hikes plunging the economy into a full blown recession.

However, 60% of those surveyed for the index still expect mortgage interest rates to increase next year.

Westpac economist Matthew Hassan said further rate hikes could still be on the table in the event of "upside surprises" to the inflation outlook.

"The next two months of inflation data and the detailed quarterly release out in late January will be critical to [The RBA's] policy decision in February," he said.

Inflation figures in the three months to December 2023 will be released on 31 January.

Mr Hassan said the December rate pause and domestic demand seemingly softening helped lift some of the 'gloom' among Aussies, but still caps off what has been a deeply pessimistic year.

"Australian consumers...have seen incomes come under extraordinary pressure from a surge in the cost of living, sharply higher interest rates and a rising tax take," he said.

"While ending on a slightly improved note, 2023 still marks the second worst calendar year for sentiment on records going back to 1974."

The weekly ANZ-Roy Morgan Consumer Confidence Index, also released today, rose 4.4%, the highest since February, with a 5.4% increase in confidence in 'Future economic conditions', while consumers were also 3% more confident about their own financial situation in the next year.

Select Westpac Consumer sentiment index results