Business and consumer sentiment have seen a significant recovery from their pandemic falls.
In fact, both measures of sentiment are now better than they were ahead of the pandemic.
With improving economic prospects, low interest rates, some industries like hospitality and tourism in the earlier stages of re-opening, and strong rebounds post-crisis, there is scope for high sentiment levels to be sustained, if not improved.
This is a positive development for at least two reasons: 1) it suggests a recovery in consumer spending and 2) it is consistent with stronger corporate profitability.
Improved consumer spending and corporate earnings are some of the key drivers behind our outlook for a stronger domestic economy and equity market this year.
Optimists outweigh the pessimists
The Westpac-Melbourne Institute consumer sentiment survey has risen above the neutral level of 100.
The survey is not only showing the optimists outnumber the pessimists, but by an amount that is above the long-term historical average.
The consumer sentiment index is also sitting about 10 points above levels seen in the months prior to the pandemic.
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Almost all of the survey’s components are close to or better than their pre-COVID-19 levels and long-term averages, including: 1) assessments of economic conditions in one year and five years; and 2) family finances now and in one year.
Although rising, the only component which is still below its long-term average is the assessment of whether it is time to buy a major household item.
Consumption has been severely disrupted by COVID-19, particularly in services, eg. tourism and hospitality.
Real household spending as of the September 2020 quarter was still down 6.5% year-on-year (YoY).
However, if the current level of consumer sentiment can be sustained, it should be consistent with real household spending growth of 4% YoY.
One of the key arguments we make for a recovery in the Australian economy this year is an improvement in consumption activity.
Business sentiment supports more optimism on earnings
Likewise, measures of business sentiment have also strengthened.
The National Australia Bank survey indicates business confidence and their assessment of conditions are both above average.
The recovery has been broad-based across sectors, although conditions in mining, manufacturing, finance, and retail have shown considerable improvement compared to the recreational and personal services and construction industries.
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Overall, business feedback around profitability, employment and trading conditions are all above their historical averages.
There is a strong relationship between business sentiment and earnings expectations. Current levels of business confidence have previously been associated with earnings growth of 10–20%.
There is scope to sustain, or even improve, high sentiment levels, with some industries, e.g. hospitality, tourism and construction, being in the earlier stages of re-opening and still catching up to the rest of the economy.
Chris Harris is an authorised representative of Ord Minnett
