Consumer Sentiment falls to a five year low: Bill Evans
EXPERT OBSERVER
The worsening coronavirus outbreak and associated rout in financial markets have had a major impact on sentiment this month. The Index has hit a five year low. In fact it is the second lowest level of the Index since the Global Financial Crisis when the Index bottomed out at 79, (with an average read of 86.8 over the period).
Therefore, while clearly very concerned, consumers are, for now, taking a more balanced approach to the situation than we saw during the GFC.
Other evidence of this can be found by comparing the ‘family finances’ and ‘time to buy a major household item’ components of the Index which registered 63.7 and 88.2 respectively at the low point of the GFC compared to the current reads of 82.7 and 111.4 respectively.
The survey detail shows consumers are rightly concerned about the near term outlook for the economy but are less perturbed about their finances or the longer term outlook for the economy. That is consistent with the notion that virus-related disruptions will be large but temporary.
At the time of last month’s survey, there were just over thirty thousand confirmed cases of COVID-19 with over 99% in China. A month later there are well over one hundred thousand cases globally with a quarter of these recorded outside of China, with infections rising rapidly in many countries.
Financial markets have also reacted sharply. After showing little change in February, the ASX dropped 11.5% between the February and March surveys (and by a further 4.5% since the latest survey closed). These falls have been despite a 25bp rate cut from the RBA and an emergency 50bp rate cut from the US FOMC.
Responses to additional questions on news recall show by far the highest recall was for news on the economy – 45% of consumers recalling news on this topic with over 85% saying that news as unfavourable. News on ‘international conditions’ also had a relatively high recall rate (25%) and was also assessed by around 85% of respondents as unfavourable.
About 20% of consumers recalled news on ‘interest rates’. The RBA cut rates by 0.25% at its March meeting. However, we again saw consumers assess this news more negatively than usual. As we have noted previously, the favourable/unfavourable mix on ‘interest rate’ news following rate cuts over the five years to 2016 was around 50/50 but has been closer to 30/70 for cuts in 2019 and 2020. That lukewarm response is despite the major banks passing on the rate cut in full to mortgage interest rates.
Across the five component sub-indexes, the biggest fall was around expectations for the economy, particularly over the near term. The ‘economy, next 12 months’ sub-index recorded a spectacular 12.8% drop taking it to 77.9, a five year low but still comfortably above the GFC low of 62.9. In contrast, the ‘economy, next 5 years’ sub-index only fell 1.3%, to 90.4. Clearly consumers expect very challenging conditions near term but are less concerned about medium term prospects.
Assessments of family finances were relatively stable. The ‘finances vs a year ago’ sub-index rose 1.8% although at 82.7 it remains 6.6% below the historical average. Despite the recent carnage in equity markets respondents were balanced about the 12 month outlook for their finances with ‘finances, next 12 months’ sub-index down by only 1.7%.
Notably, despite the RBA’s 25bp rate cut and that move by major banks to reduce mortgage rates by the full 25bps, sentiment amongst consumers with a mortgage declined 2.8% in the month.
At the same time, sentiment amongst older age groups fell more sharply, particularly those aged over 65 (–13.8%). This likely reflects several factors including the impact of lower deposit rates on incomes, the hit to superannuation from the sharemarket sell off and perhaps also a higher degree of concern about health risks from the coronavirus, which has a markedly higher fatality rate amongst those in older age groups.
BILL EVANS is Westpac's chief economist