Key insights from the week that was.
As detailed by Chief Economist Bill Evans this week, Westpac-MI consumer sentiment has now recovered the extreme 20% decline seen in March/ April when pandemic fears were at their peak. At 93.7 in June, the headline index is only 2% below the average of September 2019 to February 2020. However, that is still a level where pessimists materially outnumber optimists, and is also 7% below this time a year ago. The gains seen in the past two months have primarily been driven by emerging optimism over the outlook for family finances (from very weak levels) and confidence in the medium-term outlook to near/ above long-run average levels respectively. In contrast to the 1990’s recession, Australian consumers can see a path through this crisis.
That said, views on the current state of family finances (versus a year ago) and the economy a year ahead remain well below average levels. This is also the case for ‘time to buy a major household item’ despite the stimulus delivered to households to date and with the economy now beginning to open. ‘Time to buy a dwelling’ has been resilient in this crisis but remains well below average levels. That assessment, along with weak house price expectations and clear caution around the perceived ‘wisest place for savings’, signals significant headwinds ahead for consumer spending and investment decisions.
Unsurprisingly, despite bouncing off their lows, NAB business conditions and confidence across the economy remained deeply negative in the second half of May. Business conditions rose 10pts in the month, but remain below the GFC low. Having reached a never-before-seen low in April, confidence remained a long way below average in May. The detail of this survey further emphasise that meaningful recovery is a while off, with capacity utilisation still materially under the average of late-2019, and forward orders remaining near their recent low.
Full detail on Westpac Economics’ views of our own economy and the globe are included in the June edition of Market Outlook and were also discussed ‘in conversation’ by Chief Economist Bill Evans. Highlights this month are updated assessments of the domestic growth view and the Australian dollar. Overall, we remain very cautious on the Australian recovery, expecting the level of GDP to remain below its end-2019 level until early-2022. However, this is likely to be a better outcome than most other nations, particularly the US and Europe – as highlighted in Market Outlook. Coupled with a progressive global recovery from COVID-19, led by China and the rest of Asia, these developments are expected to support a sustained uptrend in the Australian dollar to USD0.76 at end-2021.
Emphasised by Chair Powell and the FOMC this week, and responded to by markets overnight, there are clear risks to this baseline view of sustained recovery. The key uncertainty remains COVID-19’s spread. As captured by our special COVID-19 update in June Market Outlook, those who have best contained the virus’ spread such as China, New Zealand and Australia are now well placed to avoid a second wave and to also weather the global economic consequences of COVID-19.
