Business and Consumer sentiment drops amid COVID-19 impact

COVID-19 is one of the major uncertainties that can take away thousands of lives and lead to a global recession. The disease has already infected more than 1,10,000 people across the globe.

Many countries are already issuing travel advisories, cancelling flights, putting popular tourist spots on high alerts, and increasing screenings at the airports. As the disease spreads, the world is likely to suffer from the high economic and social costs of the virus.

The share market sell-offs, ten-year yields bond at record lows and disruptions in supply have shaken consumers in and out, putting all the major economies at risk.

Falling business and consumer sentiment for the Australian economy

Severe drought, raging bushfires followed by rising unemployment, disappointing PMI data, sluggish wage growth and falling consumer sentiment - the Australian economy is already facing stiff headwinds, with the increasing threat from coronavirus adding to the already difficult situation.

Coronavirus has resulted in about 4300 fatalities till date with three deaths in Australia. Tourism, education and exports are the worst-hit sectors for Australia, which could result in severe economic consequences for the economy.

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The Treasury has already estimated a 0.5 percentage point cut off in economic growth in the first quarter due to coronavirus.

Bill Evans, Chief Economist at Westpac Banking, has predicted a contraction of 0.3% in economic growth forecast in the first and second quarters before a sharp bounce in the second half.

Westpac Bank and Melbourne Institute release two indicators, namely the Leading Index and Consumer Sentiment Index, to predict the direction of the economy.

The Westpac MI Index of Consumer Sentiment dips sharply in March

The consumer sentiment fell 3.8% to 91.9 in March from 95.5 in February, hitting a five-year low reflecting the effects of coronavirus outbreak accompanied by a collapse in the financial markets.

This gloomy atmosphere has been prevailing since mid-2019 with a slowdown in consumer demand being carried into early 2020.

With rising cases of coronavirus, fears have struck the markets. The ASX dropped 11.5% between the February and March surveys despite a 25bps rate cut by the RBA and an emergency 50 bps rate cut by the Federal Reserve.

Consumer Sentiment – February 2020

Source: Westpac website

The ‘economy, next 12 months’ sub-index suffered a huge 12.8% drop to 77.9 in March from February while ‘economy, following 5 years’ sub-index fell by 1.3% to 90.4. Both the indexes showed a negative momentum with consumers anticipating challenging conditions in the near term but not much concerned about medium-term prospects.

The assessment of family finances has remained relatively stable. The ‘finances vs a year ago’ sub-index rose 1.8% while the ‘finances, next 12 months’ sub-index was down by only 1.7%.

RBA had lowered its interest rates by 25 bps in its 03 March 2020 policy prompted by share market sell-offs and economy-wide fluctuations. Despite the translation of this rate cut into a full 25 bps cut in mortgage rates by major banks, sentiment amongst consumers with a mortgage declined 2.8% in March. The sentiment fell at a higher rate of 13.8% amongst elderly over the age of 65 showing the fears of health risks arising from coronavirus, lower deposit rates on incomes and a hit to superannuation from the share market sell-off.

The full impact of the coronavirus is yet to be felt. Concerns about the health risks, softening of the housing prices and drag in sentiments is expected in future months as a hit to tourism, education and supply chains start coming through.

Westpac- MI Leading Index continues to be negative

The Westpac-MI leading index is a composite index that constitutes nine economic indicators related to consumer confidence, stock market prices, housing, money supply and interest rates to predict the path of the economy.

The six-month annualised growth rate that shows the pace of economic activity relative to trend growth three to nine months in the future fell to -0.46% in January from -0.28% in December.

Source: Westpac website

The growth rate in the index continued to remain negative for the fourteenth straight month reflecting weak economic momentum persisting in early 2020.

Westpac has revised its growth forecast to 0% in the March quarter from 0.5% earlier after considering coronavirus and bushfires impact. However, growth is expected to rebound by 0.8% in the second quarter as the effects of virus dissipates.

Westpac’s economist expects next rate cut in the April meeting.

However, National Australian Bank’s February report released on 10 March 2020, reported that around 50% of the firms have no impact of coronavirus to date but a decline in conditions and confidence.

As per National Australian Bank’s Business survey for February 2020, there is ongoing softness in both conditions and confidence with capacity utilisation hanging around average in recent months.

“About half of the firms remain unaffected to date, and only a slight impact has been reported by the firms that have been affected. However, the number is expected to rise on coronavirus fears which might further result in worsening of business conditions and confidence. There are risks to future capex and employment growth”, stated by Alan Oster, NAB Chief Economist.

Overall, the indicators suggested that businesses foresee a little progress ahead.

Weak consumer sentiment globally

The central banks have been dovish and agreed to coordinate policy support to act in response to the rising risks of the virus to their concerned economies.

To uplift productivity, keep people in jobs, and improve business sentiments, Australian PM Scott Morrison has assured to announce a much-needed fiscal push to accelerate the economy currently hammered by COVID-19 outbreak.

The US and other foreign financial markets have fallen hard as COVID-19 continues to spread across countries. US Fed even gave a 50 bps emergency rate cut amidst rising fears.

As per Morning Consult survey data released on 10 March 2020, consumer confidence has fallen in the US, Japan, Germany, UK and France over the past three months. For the US, consumer confidence is significant since it leads to more than 65% of the economic activity in the largest economy.

Market analysts expect a short-term hit to the economy, which will not hurt the economies much if the virus outbreak is contained.