Household and business surveys released through the week reflected the deterioration in Australian economic conditions as broad-based lockdowns continue to restrict activity across much of the nation. Consumer sentiment tracked by Westpac and the Melbourne Institute fell by 4.4% in August to a reading of 104.1, taking the index to a 10-month low. The positives are that despite the Delta setback, sentiment is still in optimistic territory above the 100 line and it has shown much more resilience than during the depths of the pandemic when it collapsed to the 75-80 range. However, there has been a significant deterioration in the level of optimism by households over recent months, with the index falling by 12% from its peak in April. Following the recent outbreaks, the key factor influencing sentiment was vaccines. Sentiment amongst respondents who had received the vaccine (or planned to) was optimistic at 106.6 whereas it was outright pessimistic (95.9) for those who were not planning to receive it or were undecided about the vaccine. Local developments are also influential. Sentiment weakened in states affected by the lockdowns; New South Wales -4.1%, Victoria -10.8% and Queensland -4% but it strengthened in the 'open' states; Western Australia 4.1% and South Australia 9.1%.
The deterioration in the pandemic situation has led to a significant re-rating of households' view of the economy. The 12-month outlook was downgraded by 8.3% driven by the states in lockdown. The ongoing Sydney lockdown has seen the economic outlook in New South Wales fall by more than 23% over the past 3 months. This has spilled over into the labour market, with the unemployment expectations index lifting by 13.7% in the month as households factored in a rise in job insecurity. The housing market is somewhat decoupled from these developments, with more than 70% of the respondents expecting house prices to rise further over the coming year. The acceleration in prices is weighing on buyer sentiment amongst owner-occupiers, though these dynamics are becoming increasingly more favourable for investors. While there are headwinds over the near term with lockdowns to remain prominent until vaccination rates are much nearer to the 70-80% range being targeted by the national cabinet, assessments of the economy further out remain solid. Economic conditions on a 5-year outlook moderated slightly in August (-1.2%) but are at a strong level overall and up by 30% on a year ago.
For firms, the NAB Business Survey for July highlighted the rapid deterioration seen following the return to lockdowns. The business confidence measure turned negative for the first time since September plunging from +11 to -8, with falls recorded in all states. Business conditions weakened from +25 to +14 and while they remain above average, further declines are in prospect given the broadening and extension of lockdowns post the survey period. The sub-components were at elevated levels before the outbreaks but fell sharply on the month; trading from +32 to +12, profitability +25 to +6 and employment +18 to +10. The disruption to demand associated with the lockdown measures was reflected by the collapse in forward orders from +15 to -6, while capacity utilisation fell to a below-average level of 81.2%. Similar to households, the next few months will be difficult for many businesses until there is confidence that reopenings are imminent and that they can be sustained through higher vaccination rates.
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July's very strong US payrolls data and communications from Federal Reserve officials that the threshold for QE tapering is nearing have set the tone in markets offshore. However, there are rising concerns about the impact of the Delta variant, as highlighted by the 13.5% collapse in the University of Michigan consumer sentiment index in August. This saw the index breaking through the lows seen at the onset of the pandemic last year, weighed by a resurgence in caseloads and expectations for economic conditions to weaken. This has led to some tension in the bond market. From a closing low last week at around 1.2%, yields on 10-year maturities pushed as high as 1.36% this week — auctions for 3, 10, and 30-year maturities through the week may have been a contributing factor to the uplift — before pulling back sharply on Friday to 1.28% following the weak sentiment data. Over at the Federal Reserve this week, officials have generally been in favour of the tapering announcement coming soon. In support of a September announcement are the likes of the Dallas Fed's Rober Kaplan, the Atlanta Fed's Raphael Bostic and Boston Fed President Eric Rosengren. While refraining from nominating a start date, Esther George of the Kansas City Fed said this week that the time had come to "dial back the settings" on monetary stimulus, while the Richmond Fed's Thomas Barkin noted the FOMC was "closing in" on tapering. Further out, San Fransisco Fed President Mary Daly sees the tapering announcement coming "later this year or early next year".
Perhaps just giving a little more space to the FOMC was the week's inflation report. Annual CPI steadied in July holding at a 5.4% pace while the core rate eased from 4.5% to 4.3%Y/Y. In a sign that inflation may have peaked, the easing of the acceleration was driven by a slowdown in price pressures for durables. Following surges of between 3-3.5% in each of the past 3 months, durables CPI pulled back to a 0.6% increase in July (see chart of the week). Prominent in this surge has been used cars and trucks, new vehicles and a range of household goods and appliances. With the pandemic still weighing on services consumption, spending on goods remains at highly elevated levels with stimulus measures and strong household balance sheets driving demand. Couple that with the shortages and supply chain constraints and the response has been an acceleration in prices. While these pressures might be starting to ease, a stronger-than-expected print on producer prices (1%m/m, 7.8%Y/Y) suggests inflation will remain in the pipeline for a while yet. On the services side of the economy, CPI was a touch softer in July easing from a 3.2% annual pace to 3.0% and remains around pre-pandemic rates.
Chart of the week
Over in the UK, the recovery looks to be back on track notwithstanding some near-term headwinds associated with the Delta variant. After contracting by 1.6% in Q1 weighed by lockdowns, GDP surged by 4.8% in Q2 as the economy reopened and consumption spending rebounded. This reduced the contraction in GDP relative to its pre-pandemic level to -4.4%. Last week, the Bank of England stuck to its forecast for GDP to return to its level from Q4 2019 by the end of the year, though output growth is expected to slow in the current quarter due to precautionary behaviour associated with the pandemic.
