Daily Commentary BY THE CURVE TEAM –

Short Run Outlook Divorced From Long Run

July 16, 2020

As expected, consumer confidence has taken a hit as Covid-19 cases increased but the optimism for the long term is persistent.

The Westpac monthly consumer confidence survey fell 6.1% to 87.9 for June. The survey period captured the week where Melbourne was shutdown, but not the following week when cases spread to South-West Sydney. Until June, confidence had been picking up from its lowest ever recording in April.

Of particular concern for consumers was their expectations for the economy over the next 12 months and employment. The sentiment for economic conditions over the next 12 months and the unemployment expectations index fell 14% and 12% respectively on last month.

This is unsurprising, given lockdowns directly affect people being able to spend money, which impacts both the economy and jobs. Despite this short run view, there remains a disparity between the sentiment for the medium-long term economic outlook vs. the short-term outlook. The sentiment for economic conditions over the next 5 years is at 91.9, which is still pessimistic but is much higher than the sentiment for the next 12 months, which is at 66.4.

Implicit in this disparity is the expectation that there will be a recovery eventually from the virus but there will be some pain in the meantime. Some justification for the rosy long-term outlook has come today in the form of government spending announcements and continued positive vaccine news.

The government is set to announce today $2.5 billion in stimulus to subsidise 100 000 apprentice jobs and to train and re-skill school leavers and the unemployed. The announcement is differentiated from the current JobSeeker and JobKeeper programmes in that they are long term orientated.

Further, there was more positive vaccine news overnight, with a trial involving 45 participants showing all participants developing antibodies to the virus. Given how rampant the virus is around the world, a vaccine is the only foreseeable way to eradicate it.

Labour force data for June is to be announced today, with the unemployment rate expected to rise to 7.3% despite an expected increase in 100 000 jobs. The reason for this apparent contradiction is the expectation of a rise in the participation rate that will outstrip employment gains.

Josh Stewart

Client Relationship Manager