COVID-19’s terrible toll: Elliot Clarke

COVID-19’s terrible toll: Elliot Clarke
COVID-19’s terrible toll: Elliot Clarke


In the past week, a sharp decline in sentiment has been seen amongst Australian consumers and business. In the US, President Trump and the market remain optimistic on the ability of their economy to rebound quickly from this crisis, but data to hand is increasingly challenging this view.

Beginning with our business sector, the NAB business survey reported a dramatic decline in confidence, the index declining from -2pts in February to -66pts in March as severe restrictions over trading and social gatherings were implemented. The March level of the index compares to a reading of around -30 at the depths of the GFC, and -24 in the 1990’s recession.

Conditions also fell sharply this month, from 0pts to -21pts. This outcome is worse than the GFC (-17pts), but not as bad as the 1990’s recession (-39pts). All the components of conditions were weak in March, and the experience of businesses across the states was uniform. Unsurprisingly, business is reticent to invest in this climate, the capex expectations index falling to -23, below the GFC low of -20. Fiscal measures introduced to accelerate business investment are then set to struggle.

Turning to the Australian consumer, in April our Westpac-MI consumer sentiment survey registered the single biggest monthly decline in the 47 year history of the survey, taking the Index beyond its GFC lows to 75.6, levels only seen during the deep recessions of the early 1990s (64.6) and early 1980s (75.5). As detailed by Chief Economist Bill Evans, it is “pertinent to note that the lows in previous recessions were reached after one to two years of continuous deterioration compared to the one month collapse we have seen here”.

Consumers’ view of the ‘economy, next 12 months’ recorded its biggest monthly fall on record, a 31% drop to 53.7, in line with GFC lows. Households are however still optimistic that this is only a temporary shock, with the ‘economy next 5yrs’ sub-index only down 3.8% to 87 – still above this cycle’s lows of 85.5 averaged during the second half of 2014.

Views on family finances were also hit in April, though the cost was much less severe than for immediate expectations of the economy (down 14.8% for ‘finances, versus a year ago’, and 6.6% for ‘finances in the year ahead’). While households are hopeful regarding their financial position, very clearly they are taking preventative measures when it comes to spending, ‘time to buy a major household item’ plunging 31.6% in the month – also its largest ever shock. As detailed in the survey release, health concerns and social distancing requirements are likely on the minds of consumers, in addition to their finances. 

A similar argument can be posited for housing, with sentiment around the sector having collapsed in April. ‘Time to buy a dwelling’ fell 26.6%, and house price expectations declined by over half (-50.8%). These outcomes are discussed in more detail by Chief Economist Bill Evans in our weekly video update, along with the responses to a number of special questions on the experience of consumers in this outbreak – also highlighted in the bulletin

Turning to the labour market, while the unemployment rate was little changed in March at 5.2%, Westpac-MI unemployment expectations continued to rise, another 8% increase seen in April. Helpfully, the current level for the index of 130 is well below that seen in the GFC and the 1990’s recession, circa 180 and 170 respectively. Presumably, the Government’s JobKeeper package has given households some confidence in the labour market. It is also likely that households view the threat of job loss as temporary because it is being caused by a virus. On this point, while Westpac expect the unemployment rate to peak around 9% mid-2020, by the end of 2020, it should be back near 7%.

The significance of the JobKeeper program to Australia’s economic outlook was a key topic discussed by Chief Economist Bill Evans in our inaugural Market Outlook in conversation podcast. In this edition, Bill was joined by our Head of Financial Market Strategy Robert Rennie who covered off on key financial market developments, particularly with respect to the Australian and US dollar.

Turning to the US, the economic situation they face as a result of COVID-19 is becoming more and more severe. In just four weeks, around 22 million US citizens have now filed for unemployment benefits after losing their jobs. This loss will see the unemployment rate rise from 4.4% at March to around 15% in April. Further job loss has to be expected, and so the peak for the employment rate will be closer to 20% come mid-2020. Despite the benefit of precautionary buying in March, retail sales have already been hit hard, falling 8.7% in March, the worst outcome on record. Another, likely larger, decline will be seen in April, with durable goods and discretionary services expected to be the hardest hit.

While a sharp reduction in consumption is the prime shock coming to the US as a result of this crisis, investment in housing and the business sector has also been hit hard, and will remain weak for some time. Both Westpac and the IMF expect a contraction in US GDP of around 6.0% in 2020. While the IMF forecast a V-shaped recovery, circa 5.0% growth in 2021, we are much more circumspect, instead anticipating year-average growth around 1.0%. Hot spots such as New York City look to be coming under control, but the virus has now spread across the US, making it difficult to trace and contain. This will delay a return to normal conditions, with wide-ranging economic consequence. 

ELLIOT CLARKE is a senior economist at Westpac 

Economy Coronavirus

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