The Westpac-Melbourne Institute Consumer Sentiment Index took a steep dive in July, falling 6.1%, reversing all of last month’s gains.

According to Westpac chief economist, Bill Evans, the timing of the survey was relevant as it covered the week in which the lockdown was announced for Melbourne but the survey closed before the news of a significant cluster was reported for Sydney.

“Sentiment has been rocked by the resurgence in coronavirus cases over the last month,” he said. “That said, the index reads are significantly softer in Victoria compared to other states.”

“The ‘economy next 12 months’ sub-index recorded the biggest decline, slumping 14% in July, 25% below pre-COVID levels. There was some good news for retailers with the ‘time to buy a major item’ sub-index dipping just 2.1%, showing any pull back in buyer sentiment was mild.

“However, in both cases, the sub-index is still well below the long run average reflecting a mix of ongoing social restrictions, health concerns about entering potentially crowded shopping spaces, pressure on family finances and a reluctance to make big ticket spending commitments while there is a heightened threat of job loss,” Evans said.

Housing-related sentiment bucked the wider trend in sentiment in July, posting a moderate improvement, albeit with an uneven pattern across states and while price expectations remain deeply negative.  Consumer expectations for house prices also posted a solid gain, rising 8.5% but still remain in deeply pessimistic territory, 42% below the optimistic readings immediately prior to the COVID shock in March-April.

The Reserve Bank Board next meets on August 4 and is expected to maintain its current highly stimulatory stance and continue to commit to steady policy for the foreseeable future.

“The interest around the RBA will be the release of its latest economic forecasts on August 7. The most significant revision is likely to be the forecast that the economy will grow by 6% in 2021.That is twice the pace expected by Westpac, which is more in line with the messages around today’s survey,” Evans said.

“More immediately, the government is scheduled to announce a fiscal update on July 23. While the government is likely to release some revised economic forecasts most attention will be on its policy intentions for the December quarter and beyond.

“Before the news of the Melbourne closures, Westpac had revised its budget deficit estimate for 2020/21 to $240b from the $170b which was released in May. That revised estimate incorporated around $50b including extensions to JobKeeper ($24b); JobSeeker ($11b) and further stimulus in the October Budget ($15b),” he said.