The government is predicting that unemployment rises to 6.5% this year and stays there for the 2015/16 financial year.

It’s an outlook that will rightly worry consumers.

With mining employment projected to fall off a cliff, along with mining wages growth and indeed wages across the economy, there is one paragraph in the MYEFO that stands out as being potentially far too optimistic.

MYEFO states:

Looking through recent volatility, consumption has been growing a little below trend. While some measures of consumer confidence have been around long‑run averages, and retail trade has picked up recently, lower wage growth and employment growth are expected to impact on consumption. Growth in consumer spending in 2014‑15 has been revised down to 2½ per cent, before picking up in 2015‑16, supported by rising household wealth.

The problem is that consumer sentiment has fallen off a cliff recently, so much so that this months print “disturbed” Westpac chief economist Bill Evans. Indeed in Westpac’s Redbook which wraps up the minutiae of the sentiment indexes and what it means for the economy, Evans wrote that consumers were going be the Grinch of Christmas.

The key here is that for many years now the RBA has been expecting the wealth impact – mainly from higher house prices – to bolster spending. But it has not. As house prices have risen, Australians have been paying down the mortgage rather than opening up their wallets.

The NAB notes that in Governor Stevens interview last week he, “appears to be frustrated by the lack of ‘animal spirits’ in the economy and is questioning the momentum in the economy at the present time.” This is different to the last year when “the Bank has been comfortable with the momentum and transition in the economy that has been occurring.”

Perhaps the government is confident of a bounce in consumer sentiment, which has hit post-GFC lows this year, and because it believes the RBA will cut rates. But this reliance on the wealth effect to lift the economy when it has failed to materialise in the past few years, even with stellar property price rises, suggests room for disappointment and a somewhat Panglossian outlook for the domestic recovery at the moment.

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