Westpac consumer sentiment drops as new COVID-19 cases shake confidence: Bill Evans

EXPERT OBSERVER

The drop in confidence reverses all of last month’s impressive gain, taking the Index back to the weak levels seen in May but still leaving it 16% above April’s extreme low of 75.

The timing of the survey is relevant. It covered the week in which the lock down was announced for Melbourne but the survey closed before the news of a significant cluster was reported for Sydney.

Sentiment has been rocked by the resurgence in Coronavirus cases over the last month. After averaging about ten a day through late May and early June, new cases have lifted significantly, running at close to 200 a day in the July survey week.

These increases have been almost exclusively in Melbourne prompting the state government to reinstate lockdowns for the city and several regional areas, and the closure of Victoria’s state borders – measures that were announced in the first half of the survey week.

Daily responses suggest these announcements were followed by a slight firming in sentiment in the second half of the week.

It is of some concern that the survey pre-dates the news of a significant cluster of cases in Sydney which emerged last weekend – a day after the end of the survey.

State readings underscore the importance of virus-related developments: Victoria’s sentiment index plunged 10.4% in July but sentiment across the rest of the nation showed much milder declines (down 4.5% on a combined basis).

While milder, the weakness in other states is also likely to be linked to the outbreak in Victoria, reflecting concerns about the virus spreading interstate and spill-over effects on the wider economy.

The component detail shows the renewed COVID threat hit consumer expectations for the year ahead hard but also significantly undermined medium-term expectations for the economy.

The ‘economy, next 12mths’ sub-index recorded the biggest decline, slumping 14% in July to be 25% below pre-COVID levels – that compares to the 40% drop during the ‘first wave’ of the virus in March-April.

The ‘economy, next 5yrs’ sub-index recorded a sharp 10.3% fall.

This is disconcerting as medium- term expectations for the economy held up reasonably well during the initial COVID shock – only falling 5.1% in March–April – and were slightly above pre-COVID levels in June.

Bill Evans is the chief economist at Westpac