Confidence in the economy fell slightly in May
Economic commentary by Jakub Seidler, Chief Economist of the CBA
Economic confidence fell slightly in May, both among businesses and households. In the case of businesses, the trend was different for services and retail trade, where confidence rose and is the highest in a year, while in industry, after previous more favourable months, it fell and is also down for the third month in construction. For households, four months of rising optimism have been interrupted and confidence has fallen mainly due to less optimistic prospects for the future economic situation (Chart 1). Despite this, household confidence is still at its highest levels since late 2021, although still below the more favourable years 2015-2019 (Chart 2). Despite the May decline, the track of household confidence indicators so far is favourable and suggests strengthening household consumption, while in the case of businesses and especially industry, it confirms the volatility of the data and the very difficult predictability of future production.
Households:
After improving for several months, household confidence fell slightly in May. This was mainly driven by the future economic situation sub-indicator, which worsened in respondents' perceptions in May (Chart 3). Respondents also reported less intention to save and make larger purchases. However, these changes were less significant. Overall, household confidence has improved noticeably this year, reaching levels seen in late 2021, before the inflation/energy crisis and the war in Ukraine. This is a positive outlook for household consumption this year, which could recover even slightly faster than recent forecasts expect.
Businesses:
May brought mixed information for businesses. Confidence improved further in retail and services, both at their highest levels in a year. In industry, confidence fell again due to the usual "suspect", namely the sub-indicator "expected development of production in the next 3 months". This had dragged industrial confidence in previous months, but was now solely behind the decline. However, firms have generally reported a favourable development of production in recent months, which is confirmed by the hard numbers, but the outlook is again less favourable in this respect. In the construction sector, the decline in confidence continues for the 3rd month in a row, although the assessment of demand is improving slightly. Overall business confidence in May is roughly at a similar level to a year ago.
Today's confidence numbers, despite the decline, should not be viewed too negatively. Household confidence is still at a much better level than in previous years and signals a greater willingness to spend. In the case of industry, volatility in the numbers is relatively common, especially in the part of expected future production. However, the fact that the situation in industry is improving only very cautiously is also evident from other indicators, and the earlier rise in confidence was thus taken with some caution.
