Australian consumers now confident.

The word from Australia, as that country heads into 2007, is that while consumer sentiment "surged" in December 2006, the results do not point to boom times. With the release of the latest consumer sentiment survey on December 13, 2006 showing an increase of almost 12 points analysts point to the Christmas season and favorable unemployment statistics as the major underlying factors.

The survey-Westpac-Melbourne Institute Survey of Consumer Sentiment-is the product of a joint effort between Australia's Westpac Banking Corporation (Sydney) and the University of Melbourne.

The 11.8 point increase was more than welcome because consumer sentiment in November 2006 declined 10 points. Recently, the Reserve Bank of Australia (RBA) had been raising interest rates in an attempt to control inflation. The rate increases were thought to be the cause for the drop in consumer sentiment.

The Global Head of Economics for Westpac was interviewed on Australian Broadcasting Corporation (ABC) television on December 13, 2006, and during the interview he termed the December 2006 increase in sentiment "stunningly large."

He added, "I think that the overriding driving factor has been the strength of the labor market, that consumers feel comfortable with their employment prospects."

The economist went on in the interview to characterize the role of the recent RBA rate hikes by comparing consumer sentiment declines associated with previous rate hikes. What caught his attention was that when the RBA raised its rates causing a decline in sentiment, sentiment would subsequently rebound if there was no follow-up hike-but not to the extent of the original decline.

In regard to the December 2006 confidence survey, he said the consumer sentiment increase more than made up for the decline that followed a rate hike.

The often noted volatility of consumer sentiment indexes also came up in the interview. The ABC interviewer pointed out that a former RBA governor was fond of discounting consumer sentiment information particularly because of sentiment volatility. In spite of that caveat, however, optimism is better entree to 2007 than pessimism.

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