Businesses are complaining that a long campaign to either a September 14 election (as was assured when Julia Gillard was prime minister) or a possible alternate election date (under Kevin Rudd) is damaging consumer sentiment, and with it growth in the economy.
This view has inspired a running commentary that the election should be called ‘now’ and that somehow this will lift the uncertainty and consumers will again be confident, start spending and all will be well.
History shows that consumer sentiment is usually weaker (often by a large amount) in the three and six months prior to the election, so the business community and retailers in particular are probably right to want the election done and dusted.
That said, history also shows that after a brief respite consumers, on average, return to deep gloom six months after the election. So it is not clear that once the poll in 2013 is actually held, consumer sentiment will bounce higher and simultaneously lift spending.
The Westpac-Melbourne Institute index of consumer sentiment has been available on a monthly basis since the early 1970s which means it has covered the last 14 federal elections.
While consumer sentiment is driven by many issues – interest rates, housing and stock market prices, unemployment, inflation, wages growth, global conditions, petrol prices and many other amorphous issues, it seems that the timing of elections does matter.
The following analysis looks very simply at how consumer sentiment changed in the three and six months before each of the last 14 elections and then what happened three and six months after those elections.
For the data three and six months before the month of the election, a negative reading means that sentiment was in fact lower than the level reached in the month of the poll. In other words, consumers were pessimistic before the election and their confidence rose as the polling day emerged.
Conversely, a positive reading for the numbers prior to the poll means that consumers were relatively optimistic, but that diminished as the poll neared.
Out of the last 14 elections, consumer sentiment was relatively weak an amazingly frequent 11 times six months before polling day, often by a significant amount. Indeed, consumer sentiment on average was 6 per cent higher on election day than the level recorded in the six months prior.
The interesting thing is that as the election draws near, consumer sentiment tends to remain subdued. Three months before the election, the average level of consumer sentiment is 6.9 per cent lower than the level of sentiment on election day.
The table below rebases consumer sentiment set to zero in the month of the election with the change presented as percentage changes from the election date.
6 months prior
3 months prior
3 months after
6 months after
If consumers are relatively gloomy before an election, what happens after the dust settles and we have politics decided?
Over the past 14 elections, three months after polling day consumer sentiment has risen on six occasions and fallen on eight. On average, consumer sentiment was just 1.9 per cent lower three months after election day. But things got worse six months after election day, consumer sentiment was lower in 11 out of 14 observations and the fall was an average 12.4 per cent.
Is this the new government taking the unpopular decisions soon after the poll? This cannot be worked out from the data.
All of which suggests that consumer sentiment is soft leading into an election, it rises in the month of the election and then fades away.
Yesterday saw the release of the consumer sentiment data for July. It was steady at a level of 102.1, which Commonwealth Bank senior economist Michael Workman noted was “just above its long-term average of 101.4”. In other words, with the election just a few months away, consumers are moderately optimistic.
Will it rise as the election looms and then fall away in the new year?
If history is any guide, it will.
In the end, does consumer sentiment matter?
According to this chart produced by the economics team at ANZ Bank, it does.
At current levels, the consumer sentiment component that looks at household perceptions of current economic conditions is consistent with growth of around 4 per cent in household consumption spending. This is strong. Some may even argue that if sentiment and spending were much stronger, it might be too robust and the Reserve Bank would be hiking interest rates to cool things down.
All of which suggests there may or may not be much link between election timing and sentiment and that, at current levels, consumers seems to be content. All of this work and no conclusive results!