Consumer confidence hits 14-month high; Employment conditions highest in 27 months

Consumer confidence; NAB Business survey; Economic forecasts

• Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating rose by 2.3 per cent – the most in six weeks – to an equal 14-month high of 111.2 (long-run average since 1990 is 112.6).
• Consumer views on economic conditions: The ‘Current economic conditions’ sub-index jumped 9.1 per cent to 2.0 points – the highest level since August 4, 2019. And the ‘future economic conditions’ sub-index climbed 5.9 per cent to 16.1 points – the highest level since June 2, 2019.
• Business survey: The NAB business confidence index fell from a 31-month high of +12.7 points to +4.5 points in December (long-term average is +5.1 points). But the business conditions index lifted from +7.0 points to 28-month highs of +14.2 points (long-term average is +5.3 points). The employment conditions sub-index rose from -4.2 points to a 27-month high of 9.3 points.
• Global growth forecasts: The International Monetary Fund (IMF) expects the global economy to expand by 5.5 per cent in 2021, which is 0.3 percentage points higher than the October 2020 forecast. The global GDP forecast for 2022 was unchanged at 4.2 per cent. The Australian economy is tipped to expand by 3.5 per cent in 2021 (previous forecast: 3.0 per cent) and 2.9 per cent in 2022 (previous forecast: 2.8 per cent).

The consumer confidence data has implications for retailers, and other consumer-focussed businesses. The business survey has broad implications for investors and the economy. Global economic forecasts are useful for exporters and companies that trade across a range of countries.

What does it all mean?

• Consumer confidence is back at the highest level since November 3, 2019. Why? Australia’s continued success at supressing the coronavirus has lifted spirits after a difficult start to 2021. Lockdowns have ended in Greater Brisbane and Sydney’s Northern Beaches. Morale has been boosted following an extended period of ‘donut days’ of zero community transmission of Covid-19 in Victoria and NSW. In fact, Victoria has reported 21 consecutive days since its last locally acquired Covid-19 case.
• The ANZ-Roy Morgan Consumer Confidence index rose by 2.3 per cent last week – the most in six weeks – after sentiment had eased for three consecutive weeks. Consumers are more upbeat about Australia’s economic prospects due to the solid recovery in the labour market. In the final three months of 2020, around 320,400 jobs were added or reinstated with the unemployment rate easing to 6.6 per cent in December. On the back of this news, consumer views on ‘current economic conditions’ jumped 9.1 per cent last week to 2.0 points – the highest level since August 4, 2019. And the ‘future economic conditions’ sub-index climbed 5.9 per cent to 16.1 points – the highest level since June 2, 2019.
• But Covid-19 flare ups in Sydney and Brisbane dented business confidence in December. The survey of 400 Aussie firms took place in the first half of January 2021, capturing the short, but sharp lockdown in the Sunshine State capital due to virus variant concerns. Confidence was down 10 points in both NSW and Queensland, according to NAB economists. And Victorian confidence dropped 15 points as state borders were shut on virus concerns.
• But it wasn’t all bad news. Business conditions – as measured by NAB – hit the highest level in 28 months in December with most indicators now broadly at or above pre-pandemic levels. Conditions are strongest in the mining, finance, property & business services, retail and wholesale industries. And employment conditions are the best since September 2018, implying further jobs growth. Capacity utilisation was at 10-month highs in December at 80.9 per cent, suggesting further improvement in business conditions as the post-pandemic economic recovery gains traction.

What do the figures show?

Consumer sentiment – Week ended January 24, 2021

• The weekly ANZ-Roy Morgan consumer confidence rating rose by 2.3 per cent – the most in six weeks – to an equal 14-month high of 111.2 (long-run average since 1990 is 112.6). Confidence is up by 70.3 per cent since hitting record lows of 65.3 on March 29, 2020 (lowest since 1973).
• Three of the five major components of the index rose last week:

National Australia Bank Business Survey – December 2020

• The NAB business confidence index fell from a 31-month high of +12.7 points to +4.5 points in December (long-term average is +5.1 points). But the business conditions index lifted from +7.0 points to 28-month highs of +14.2 points (long-term average is +5.3 points).
• The rolling annual average business confidence index rose from -12.2 points to -11.2 points in December. The rolling annual average business conditions index lifted from -6.4 points to -5.1 points.
• The survey was conducted in the period January 5-15, 2021 across 400 firms.
• Key Components: The index of trading conditions rose from +14.5 points to +19.9 points; employment improved from ‑4.2 points to +9.3 points; profitability fell from +13.1 points to +10.5 points; forward orders eased from +6.0 points to +1.2 points; stocks rose from -7.3 points to -1.1 points; exporter sales decreased from ‑16.3 points to ‑17.3 points.
• Inflationary indicators: The monthly reading of labour costs rose at a 0.8 per cent quarterly rate in December after rising 0.2 per cent in November. Purchase costs were up 1.1 per cent (November: +0.4 per cent). Final product prices were flat (November: -0.1 per cent). Retail prices were up 1.2 per cent (November: +0.6 per cent).
• Capacity utilisation rose from 79.1 per cent to a 10-month high of 80.9 per cent (81.0 per cent is the long-term average).
• The proportion of firms reporting that they did not require credit rose from near 43 per cent to near 60 per cent.
• NAB noted, “Business conditions rose further in December to its highest level since late 2018 at 14pts. This marks a fourth consecutive month of improvement and, encouragingly, employment conditions are back in positive territory for the first time since the start of the pandemic. Business conditions are now well above average, suggesting there is strong momentum in Australia’s economic recovery. In contrast, business confidence fell back to 4pts, as confidence pulled back in NSW, Victoria and Queensland. In part, this likely reflects the impact of the Sydney COVID-19 outbreak through December.
• Elsewhere, capacity utilisation saw further gains and is now around its long-run average (and pre-virus levels), while forward orders pulled back but remain in positive territory. These leading indicators suggest the pipeline of work continues to build – pointing to an ongoing recovery in the months ahead. Most indicators within the survey are now broadly at or above pre-virus levels, with the exceptions being export conditions – no surprise given the pandemic continues to disrupt global trade – and capital expenditure. That said, capex has been recovering since reaching a trough in mid 2020 and, should conditions remain elevated, will likely turn positive again as businesses renew investment plans, especially given government tax incentives in place.”

International Monetary Fund (IMF) World Economic Outlook (WEO) – January 2021

• According to the IMF, “Although recent vaccine approvals have raised hopes of a turnaround in the pandemic later this year, renewed waves and new variants of the virus pose concerns for the outlook. Amid exceptional uncertainty, the global economy is projected to grow 5.5 percent in 2021 and 4.2 percent in 2022. The 2021 forecast is revised up 0.3 percentage point relative to the previous forecast, reflecting expectations of a vaccine-powered strengthening of activity later in the year and additional policy support in a few large economies.”
• And, “The strength of the recovery is projected to vary significantly across countries, depending on access to medical interventions, effectiveness of policy support, exposure to cross-country spillovers, and structural characteristics entering the crisis.”
• For Australia, the economy (GDP) is tipped to expand by 3.5 per cent in 2021 (previous forecast: 3.0 per cent) and 2.9 per cent in 2022 (previous forecast: 2.8 per cent).

What is the importance of the economic data?

• The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.
• The monthly National Australia Bank business survey is valuable in providing a timely reading about the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.
• The International Monetary Fund provides forecasts for world economies each quarter: January, April, July and October. The data is important for financial markets, trading companies and global-dependent businesses.

What are the implications for investors?

• Australia’s success in suppressing the virus is key to both consumer and business confidence. Business sentiment dipped at the end of last year due to Covid-19 outbreaks in Sydney and Brisbane. The reimposition of state and territory border restrictions also weighed on Victorian confidence with supply chains disrupted.
• After easing for three successive weeks over the Christmas-New Year period, consumer confidence bounced back after lockdowns ended in Sydney’s Northern Beaches and Greater Brisbane.
• Continued jobs growth is also critical to consumer sentiment and retail spending. NAB’s employment conditions index – often seen as a leading indicator of jobs growth – hit a 27-month high in December. Encouragingly, NAB economists reported a pick up in labour market conditions across all industries with around 90 per cent of jobs lost at the peak of the pandemic recovered by December.
• While still highly dependent on developments with the virus, business and consumer confidence are expected to improve as Covid-19 vaccines are rolled out from February, and households and firms reduce their savings. Business investment and hiring remain important to an expected rebound in economic activity with the IMF forecasting Aussie GDP growth of 3.5 per cent in 2021 after a 2.9 per cent pandemic-fuelled contraction in 2020. Should this materialise, it would be the strongest annual growth rate since 2012.