Consumer confidence almost back to pre-COVID levels, says Westpac chief economist

Consumer confidence almost back to pre-COVID levels, says Westpac chief economist

A spike in employment and underemployment has failed to dampen Australians' spending intentions, with the Westpac-Melbourne Institute Index of Consumer Sentiment rising 6.3 per cent this month.

Westpac Chief Economist Bill Evans says the index level of 93.7 is just two per cent below the average from September to February.

"Remarkably, consumer confidence is now back around pre-COVID levels, having recovered all of the extreme 20 per cent drop seen when the pandemic exploded in March-April," says Evans, who has recently advocated for negative interest rates to stimulate the economy.

"Confidence has clearly been buoyed by Australia's continued success in bringing the Coronavirus under control, which has in turn allowed for a further easing in social restrictions over the last month."

However, he notes sentiment was already "on the weak side" prior to the COVID-19 shock, when the index showed a persistent excess of pessimists over optimists.

"With the unemployment rate set to remain elevated; extensive restrictions staying in place and the economy facing permanent structural change it would be surprising if the recent upward momentum continues and is able to sustain a stable level of confidence which is above that previous period," says Evans.

"We have also seen more even confidence levels in the major states as restrictions begin to be eased extensively across the country."

Victoria's consumer confidence index lagged NSW in May with an 8.4 per cent lift compared to 23 per cent, but this month Victoria's level has jumped by 11.9 per cent, placing it ahead of the national average at 94.9.

Confidence NSW is also above the national level at 95.5, representing a rise of 4.8 per cent.

"While the monthly gains are impressive, the Index is still relatively weak by historical standards in pessimistic territory overall and down 7 per cent on a year ago," the economist explains.

"The general picture is of continued intense pressure on family finances and concern about the nearterm outlook for the economy but with firming optimism around prospects for finances in the year ahead and the economy's medium-term outlook."

He says the contrast between that medium-term outlook in this recession compared to the last recession in the 1990s is important, as it is 50 per cent higher than the average over those "long four years".

"Respondents are confident that they can see eventual better times ahead whereas in the early 1990s there was a pervasive mood of despair for years," he says.

"All component indexes recorded gains in June but the largest improvements were around views on the economic outlook and 'time to buy a major item'.

"Consumer concerns around the economy are definitely easing. The 'economy, next 12 months' sub-index is up another 8.4 percent and the 'economy, next five years' sub-index is up 6.4 per cent," he says, clarifying this is however from an "exceptionally weak base".

Meanwhile, consumer assessments of family finances are up 3.6 per cent versus a year ago, while their forward views are in "net optimistic" territory 105.3; just a couple of points shy of the long-run average of 107.5.

Evans says this mix points to what is likely to be a delicate period for policy.

"A tangible improvement in finances, linked to the reopening of the economy, will be required (rather than just an expected one)," he says.

"This improvement will need to be firmly in place before key supports to household finances such as JobKeeper, JobSeeker and home loan repayment holidays can be withdrawn.

"On a more promising note, the picture from buyer sentiment suggests we may see a significant 'pop higher' in some forms of spending near term."

Sentiment around housing showed a modest improvement in June, with assessments around 'time to buy' consolidating on previous gains and price expectations showing a lift, albeit to still very weak levels.

"The 'time to buy a dwelling' index dipped 0.5 per cent but held on to most of May's strong rebound following the collapse in this index in April.

"At 107.6, the index continues to hold in positive territory but is still well below 2019's average level of 118 -  a pattern evident across all of the major states.

"To date, house prices have held up surprisingly well, albeit on extremely low turnover. Resilient reads on 'time to buy a dwelling' are encouraging but the survey continues to point to a sharp deterioration in the outlook for prices compared to a few months ago."

This pessimism extends across all the major states, although Evans observes it is somewhat more entrenched in Victoria (75.3) than in NSW (84.2).

"Responses to additional questions on the 'wisest place for savings' show risk aversion has lifted since March," he says.

Updated at 11:47am AEST on 10 June 2020.

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