Key insights from the week that was.
Coronavirus continued to make headlines this week; but for the economy, sentiment was the focus.
While Australian consumer sentiment firmed in February according to our Westpac–MI survey, at 95.5 the index remains well below its long-run average, suggesting consumers remain pessimistic. This downbeat mood has been in place since mid-2019 and has coincided with a pronounced deterioration in consumer spending momentum.
Economic conditions ‘next 12 months’ and ‘next 5 years’ both bounced back in February but remain below the level of November 2019 and are only in line with their respective long-run averages. This is despite continued strength in employment growth as well as the considerable policy easing undertaken by both the RBA and Federal Government in 2019.
Given this policy context, more concerning still is that ‘family finances versus a year ago’ fell again in February to be back near its recent low and well below average. ‘Finances, next 12 months’ is almost 11% below the average of first-half 2019, and also materially below its long-run average. Unsurprisingly, the ‘time to buy a major household item’ index is depressed, 8 percentage points below average.
Interestingly, ‘time to buy a dwelling’ reversed January’s gain to be back near its recent low in February. On a longer view, at its current level of 112, this index is well below 2019’s peak of 127 but still materially above 2017’s low of 90. At play here is arguably a reduced belief amongst households that further interest rate cuts will be seen in 2020 as well the impact of housing affordability.
House price growth expectations remain strong nonetheless, having surged 70% over the nine months to January 2020. The December housing finance data points to strengthening demand amongst owner occupiers, the value of loans up 23% since May and back near 2017–18’s peak. Investors are more circumspect. While 16% above the May low, the value of loans is still comparatively low – in line with the 2012 experience.
Turning to the business sector, the NAB business survey indicates confidence remained absent and conditions weak in late January. There are clearly a number of global and domestic headwinds for confidence. However, the greater concern is conditions. Profitability is weak, while trading conditions and forward orders are poor. The employment index has also lost momentum to now point to job gains circa 16k per month compared to 25k in mid-2019. Assuming flat participation, this would see the unemployment rate grind higher in 2020 – the opposite of what the RBA needs to see to have confidence that wages, growth and consequently inflation will firm as set out in their February Statement on Monetary Policy and Governor Lowe’s appearances last week (summarised in our February Market Outlook).
Following the RBA last week, the latest MPS from the RBNZ set out their view of the outlook. On the assumption of a very mild coronavirus impact, the RBNZ are sanguine on the outlook and expect to keep the stance of policy unchanged hence. This is as our New Zealand economics team anticipated, but more optimistic than markets were positioned for. Both the labour market and inflation views support this adjustment, but the most prominent rationale for the change of stance is the Government’s plan to increase spending. A cash rate cut is still expected in August by Westpac New Zealand, but this will principally be as a result of a weaker global backdrop which will put sentiment and growth at risk. A stronger New Zealand dollar, which we expect, would also weigh on inflation.
Moving to the rest of the world, our latest Market Outlook expands on the key economic effects of coronavirus and encapsulates all of the changes seen in the global and domestic economies since our last edition back in December. Succinctly for Australia: we anticipate our economy will be materially weaker in 2020 than the RBA currently anticipates; importantly, this is only partly attributable to summer’s bushfires and the coronavirus outbreak. Further, for the global economy, risks are clearly skewed to the downside.
Developments in global commodity markets highlight both the immediate loss from coronavirus as well as the risks to global production. Global FX markets however view this uncertainty as being contained in Asia, arguably because central banks elsewhere are seen as both willing and able to act. This is particularly the case for the US which has received a solid bid as a safe-haven. While the Australian dollar has taken a tumble in line with commodities, it will likely find a base and could strengthen in late-2020 if the RBA does not counteract the US rate cuts we forecast with concerted monetary easing here. Absent this step, Australia’s competitiveness and corporate profitability could become impaired, reducing the probability of the lift back to trend GDP growth we currently anticipate in 2021.