Australia’s sentiment shift hints at consumption-led revival

Australia’s November consumer sentiment marked a clear inflection in household psychology, with the Westpac–Melbourne Institute index rising to 102.3—its first reading above the neutral 100 threshold since early 2021. The data indicate that households now expect economic conditions to improve rather than deteriorate, suggesting a recalibration of demand expectations after two years of monetary tightening. Following the Reserve Bank of Australia’s (RBA) cumulative rate increases from 0.1 percent to 4.35 percent, this renewed optimism implies that households are internalising the end of the tightening phase and anticipating real income recovery as inflation cools from a 7.8 percent peak in late 2022 to 3.4 percent in the third quarter of 2025.

The sentiment rebound reflects an alignment of labour-market stability, easing inflation, and fiscal support. Unemployment remains contained at 4.1 percent, while wage growth has moderated to 3.8 percent year-on-year, consistent with the RBA’s projection for inflation to return to the 2–3 percent target band by mid-2026. Mortgage arrears have stabilised at 0.9 percent of total loans after peaking at 1.1 percent in mid-2024, reflecting improved debt-service capacity. Upcoming stage-three tax cuts scheduled for July 2025 have reinforced expectations of higher disposable income, helping to steady household balance sheets after a 12 percent cumulative decline in real housing wealth since the 2022 peak.

Market reaction has been constructive. Retail and discretionary equities, including JB Hi-Fi (ASX:JBH) and Woolworths (ASX:WOW), led gains with the ASX 200 Consumer Discretionary Index up 2.3 percent on the week. Sovereign yields eased as bond investors priced in lower recession risk; 10-year Australian Commonwealth Government Bond yields fell 8 basis points to 4.32 percent. The Australian dollar (AUDUSD=X) held firm around 0.69, reflecting stronger domestic sentiment and contained inflation expectations, both of which anchor import prices and reduce the risk of renewed price pressures.

Historically, similar rebounds in sentiment—most notably in 2009 and 2013—preceded upswings in household consumption of roughly 1.2 to 1.5 percentage points within three quarters. However, this cycle’s elevated leverage and high mortgage-servicing ratios, with household debt near 188 percent of disposable income, suggest a more muted multiplier effect. Real wage growth will be decisive: Treasury simulations indicate each one-percentage-point gain in real earnings could lift GDP by 0.3 percentage points. Consensus forecasts place 2025 GDP growth at 1.6 percent, but partial recovery in consumption could push that closer to 2 percent by late 2026.

Risks remain balanced. The decline in Brent crude below USD 80 per barrel mitigates headline inflation, but renewed geopolitical or shipping disruptions could re-introduce volatility. A premature rate cut by the RBA would risk re-inflating asset prices before productivity strengthens, currently trending near 0.6 percent annualised. A more sustainable trajectory would channel improved sentiment into investment and capacity expansion rather than consumption-led overheating.

If the sentiment index holds above 100 through the March 2026 quarter, sequential retail-volume growth and stabilising dwelling approvals are likely. Bond markets will assess whether this confidence rebound translates into higher long-term neutral-rate expectations—a key indicator for asset allocation shifts toward cyclical sectors. Over a six- to twelve-month horizon, baseline projections point to GDP re-acceleration toward 2 percent by late 2026, validating early signs of a soft landing while testing policymakers’ ability to steer the transition from disinflation to balanced growth.