When was the last time you felt ahead on your finances? 

 

By many traditional measures, Australia has done surprisingly well. We avoided recession, unemployment stayed low and the housing market - bar some wobbles - largely held up.

 

Yet ask most of us how we're feeling about the economy, or our own financial outlook, and the answers paint a different story.

 

Having spent the past few years defying economic gravity, Australia's landscape has become a study in chiaroscuro, whereby the light of near missed recessions is psychologically dimmed by the grinding realities of cost-of-living woes and permeating financial anxiety.

 

Despite the OECD finding Australians have experienced a sharp decline in living standards over recent years, the latest Westpac-Melbourne Institute Consumer Sentiment survey indicates flickers of optimism are returning. 

 

The two reports point to a convoluted national mood that is seeing consumers feeling better before they are necessarily better off.

 

Mixed emotions

The OECD measures what households have lost, while consumer sentiment is more concerned with how they feel about what comes next.

 

According to the former, Australian real wages have fallen around 5 per cent since March 2021, one of the steepest deteriorations among advanced economies. 

 

The labour market has held up comparatively well. Australia's unemployment rate was 4.4 per cent in May, below the OECD average of 4.9 per cent, while labour force participation remains high by international standards.

 

But employment strength has not fully protected purchasing power.

 

For many households, having a job has softened the blow. It has not restored the ground lost to inflation, higher interest rates, rising rents, insurance costs and everyday bills.

 

Despite that sobering backdrop, the latest Westpac-Melbourne Institute Consumer Sentiment Index rose 4.1 per cent in July to 83.9, suggesting consumers are becoming less pessimistic about the outlook. 

 

Westpac senior economist Matthew Hassan notes, "some of the July improvement looks to be relief that 'worst case' scenarios around energy prices, interest rates and jobs are not playing out."

  

The improvement was most evident in how consumers viewed their own financial outlook. The survey's measure of family finances over the next 12 months jumped 13.4 per cent in July. Assessments of family finances compared with a year ago also lifted.

 

A key reason was petrol. Average pump prices fell to around $1.60 a litre during the survey week, unwinding the spike linked to tensions in the Middle East. The strongest uplift in sentiment came from groups typically more sensitive to fuel prices, including renters, younger Australians and lower-income households.

 

Australians may not feel richer, but they are feeling less gloomy about what comes next. The July survey found fewer people expect unemployment to rise, suggesting labour market fears are beginning to ease.

 

But optimism and wealth are not the same thing. Even after the July rise, consumer sentiment remains deeply pessimistic by historical standards, sitting in the bottom 10 per cent of records over the survey's 50-year history. According to the OECD, many households remain under pressure as inflation continues to erode what their incomes can buy.

 

Australians have largely kept the jobs. What many households feel they have lost is breathing room.

 

For much of the country’s modern economic history, confidence and prosperity travelled together. As living standards rose, so too did our faith that tomorrow would be better than today. There appears to be a break in that parallel.

 

Even so, the latest sentiment data suggests Australians are returning to hope. After years of feeling squeezed, many households still do not feel ahead, but they are beginning to believe the worst may be over.