Key insights from the week that was.

Surveyed just after Victoria entered stage 4 restrictions, our August Westpac-MI consumer sentiment survey was this week’s pivotal release.

The 9.5% decline in August to very near the extreme low seen in April 2020 (as COVID-19’s health and economic consequences were first felt) was a shock. Even more so given the state outcomes which drove the national result.

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Intriguingly, the decline in sentiment in NSW this month was greater than in Victoria (respectively 15% and 8%), while the fall in Queensland was in line with Victoria. As discussed by Chief Economist Bill Evans, these results highlight households’ ‘fear of the unknown’ with respect to COVID-19’s potential to spread and the economic cost.

The latter issue is clearly seen in the short and medium-term economic outlook components of our sentiment survey. Consumers’ concerns over the economy are most pronounced for the coming 12 months, down 30% since June to be 40% below average; but the past two months have also shown an abrupt deterioration in the 5-year outlook index, down 18% over the past two months to be 8% below average. It is not surprising that consumers’ attitudes towards discretionary spending are highly cautious, particularly as they are not only concerned about their job prospects, but also their wealth – our indicator of house price expectations is currently more than 40% below average.

Regarding the labour market, there was good and bad news this week. The bad news was that the Q2 wage price index came in below expectations at just 0.2%, 1.8%yr, lows back to the beginning of the series in the mid-1990’s. Public wage growth held up, and scheduled increases under enterprise bargaining agreements and awards were seen in the private sector. But private wage growth still fell to just 0.1% in Q2 overall as many businesses reported market-based reductions in wages paid under individual arrangements. Bonuses in the private sector also took a hit, the private WPI including these payments falling 0.1% in Q2 to be up just 1.5%yr.

Some positive news was provided by the labour force survey however. July saw 115k jobs created, bringing the total recovery over the past two months to 343k – towards half the 872k job loss of April/May. While the unemployment rate drifted higher to 7.5% in July, this was on higher participation; underemployment meanwhile fell 0.5ppts in the month as growth in hours worked outpaced the gain in the number employed.

The key point from this release, and indeed July NAB busines conditions is that, once COVID-19 is successfully suppressed, our economy has the capacity to quickly regain lost ground. However, as per both consumer and business confidence, the outlook will depend critically on authorities successful (and quick) suppression of the Victorian outbreak, allowing for a sustained easing of restrictions and a return to more normal spending patterns across the nation.

Turning to New Zealand, after 100 days of no local transmission, new cases were found this week. Our New Zealand economics team have today provided guidance on three possible outcomes, depending on the extent of the contagion and the scale of restrictions necessary. In short, if Alert Levels are not raised further and normality returns, the economic cost will be relatively small and quickly recovered. A new Stage 4 lockdown would have a material impact on activity and the labour market however, with peak unemployment likely closer to 8% than the currently forecast 7%. Once restrictions were lifted though, recent experience suggests the economy would bounce back quickly, thanks in part to expected additional fiscal aid from the New Zealand Government and sustained monetary accommodation from the RBNZ.

Further afield, data and developments have been limited this week. US markets have remained optimistic on the recovery, taking the positives from incoming data. This is despite the enduring fiscal stimulus stalemate – as highlighted by President Trump’s decision to issue Executive Orders to extend fiscal support. There are questions over the legal validity of this stimulus, and also whether state governments will be able to afford to contribute as required. What is clear though is that this round of aid is materially smaller and shorter in duration that the initial package. Absent a deal, this situation creates yet another headwind for the US economy in H2 2020.

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