Key insights from the week that was.
In February, Westpac-MI consumer sentiment recovered roughly half the ground lost in January. This result leaves sentiment only marginally below the 10-year high achieved in December. Looking at the detail of the report, consumers are clearly very positive on the outlook for the economy, with the sub-component measuring views on the 1-year and 5-year outlook respectively 21% and 27% above average. Family finance expectations are more circumspect: versus a year ago and for the year-ahead, expectations were broadly in line with their long-run averages in February.
As detailed by Chief Economist Bill Evans this week, sentiment and the sub-component detail suggests younger consumers are far less optimistic on the outlook. 18-24 year old consumers arguably have felt the economic effects of the pandemic disproportionately; they also have more reason to be concerned over housing affordability. In contrast, older consumers with established careers and those who have already built up considerable financial wealth have good reason to be optimistic given equities have rebounded and seeing as housing is well supported by monetary policy and an improving labour market. That said, it seems housing affordability is a concern for many households, not just the young. While house price expectations are 24% above average at a 7-year high, the ‘time to buy a dwelling’ sub-component has fallen almost 9% since November. Westpac’s view on house prices was one of the ‘hot topics’ discussed in our latest Market Outlook in Conversation podcast.
Turning to the business sector, the NAB business survey has experienced considerable volatility in recent months as restrictions imposed to stop COVID-19 were lifted. In the January update, business conditions and confidence were both reported to be materially above average. Importantly, this strength was wide spread by state and by industry – recreation and personal services being an exception given the ongoing need for social distancing. As restrictions continue to be eased domestically and the global vaccine rollout continues, Australian business conditions and confidence should remain well supported.
Moving offshore, this week we received the latest loan and aggregate financing data from China. As anticipated, new bank loans and total financing (which also includes market issuance and non-bank lending) were both strong ahead of February’s lunar new year holidays. This data and the money supply detail point to businesses accumulating cash to spend on production and investment in coming months. As we outlined in our latest Market Outlook, China is into a new growth cycle having already more than regained the ground lost in the pandemic. Further, the new investment cycle has already broadened across the economy, most notably to key industries in the private sector which have the capacity to scale up both production and profitability. All available information then points to a robust uptrend through 2021 for investment and household incomes, and consequently continued economic development over the medium-term.
China is also set to benefit from ultra-accommodative global financial conditions and the world’s recovery from COVID-19. On financial conditions, this week FOMC Chair Powell made clear that a strong recovery won’t be enough to justify a material tightening of policy. This will only occur once full employment has been regained and inflation is at or above 2%yr sustainably. These goals are a long way off even if GDP growth runs at a multiple of potential through 2021. On COVID-19, the past seven days have also seen an average of just over 100k new cases per day, less than half the 250k of early January. For both activity and confidence, this is a big positive. Our outlook for the US was also discussed in our February Market Outlook in Conversation podcast.