This week we saw evidence of the economic benefit stemming from Australia’s success in containing COVID-19’s spread.
A month ago Westpac reported the largest ever fall in consumer sentiment, the Westpac-MI index falling 17.7% in April. In May however, that loss has been largely reversed, with sentiment rising 16.4%. The index is now only 7.6% below the average of September 2019 to February 2020, albeit still at a low level versus history. Clearly Australian consumers have taken heart from the success Australia has had in containing the virus. Notably, consumers are currently much more optimistic on the longer-term outlook than during the 1990’s recession. Large jumps in year-ahead economic expectations and ‘time to buy a major house item’ further show that consumers increasingly believe that the opening up of the economy (i.e. the start of the recovery) is in sight. As highlighted by Chief Economist Bill Evans, “consumers can understand and envisage the recovery”.
From our survey, there is also evidence that consumers believe the labour market will strengthen with the recovery in activity, May’s decline in unemployment expectations effectively wiping out the March/April rise. However, when it comes, the recovery will be from a very weak starting point. Highlighting this, the April labour force survey reported the loss of 594k jobs in the month and a 1ppt rise in the unemployment rate to 6.2% despite a 2.5ppt decline in participation. There was also a sharp lift in the number of workers who are working less than they are willing and able to, underemployment rising almost 5ppts to 13.7% in the month. Combined with unemployment, this puts the share of the labour force currently underutilised at a historic high of 19.9%. Further outsized job losses will be seen in coming months.
While the labour market will improve in the second half and beyond, labour market slack will remain pervasive, restricting incomes and spending. A further headwind for spending is likely to come from wealth, both actual and expected. Highlighting this, house price expectations from the consumer sentiment survey failed to bounce meaningfully in May (+4.6%) after falling 50% in April. As outlined by Chief Economist Bill Evans, material, active support from the Government will prove necessary for an extended period until the risks apparent in current business conditions abate, and confidence returns.
Over in New Zealand this week, stimulus was the focus with the announcement of a material increase in asset purchases by the RBNZ followed by a larger than anticipated fiscal stimulus package from the Government in Budget 2020. Given the effect of the lockdown and the risks to the outlook, both domestic and global, our New Zealand team believe this is the right approach. In circumstances such as these, not doing enough is the far bigger risk.
In the US, following a strong run for equity markets, risks to the growth outlook came back to the fore this week. This was principally the result of comments made by senior officials over the spread of the virus in the US as well as its economic cost, respectively by Dr Anthony Fauci and FOMC Chair Jerome Powell. On both fronts, Westpac has much greater concern over the risks than the White House which is why we expect the US’ recovery to be so slow, a 1.1% gain in 2021 to follow a 6.0% GDP decline in 2020 in year-average terms. The implications for the US dollar are uncertain however as many other jurisdictions also continue to struggle with containment and stabilising their economies. Inevitably, we expect Asia will lead the way in this recovery owing to its success with containment as well as the region’s underlying growth potential.
The above and other key themes from May Market Outlook are discussed in depth in our just released May Market Outlook in Conversation podcast.
