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Cheers! Victoria powers 'reopening pop'

07:49pm October 29 2020

Westpac senior economist Matthew Hassan discusses consumer sentiment and the economy. (Josh Wall) 

While twists and turns have become a given during the COVID-19 pandemic, a range of indicators suggest a meaningful “reopening pop” in the economy is underway, particularly in states able to relax restrictions.

This has clearly been seen in the Westpac–Melbourne Institute Consumer Sentiment Index, which staged a big rally in September and October to sit a 105, 19 per cent above its level in July, as the federal budget went down well with consumers and COVID news flow improved. 

Victoria’s reopening this week from one of the toughest lockdowns in the world after getting its “second wave” outbreak under control will only amplify the pop as consumers get out and spend, and enjoy regaining some semblance of “normality”. 

However, there are several reasons to be a little more circumspect. 

Firstly, the course of the virus itself remains unpredictable. For now, the news is good (in Australia at least), but we have been here before and the situation can change very quickly. Secondly, sentiment measures offer less guidance than usual given the size of the shock to the economy. Thirdly, we must remember the COVID recession is set to cast a long shadow over the economy. 

As such, we expect the recovery to unfold in three distinct phases: 1) the initial reopening pop; 2) a difficult transition period next year; and finally 3) a sustained period of above trend growth.

A variety of indicators confirm the pop is already underway amid strong consumption growth – our Westpac Card Tracker implies card activity is running comfortably above its pre-COVID pace in October. 

But even with the recession likely to have already ended in technical terms (two consecutive quarters of contracting GDP) and the reopening pop, the economy will still be operating well below pre-COVID levels next year and a difficult transition period looms as policy supports are withdrawn and delayed effects – such as prolonged higher unemployment – start to weigh. This is phase two. 

Heading into 2022, however, activity and consumer demand should see a clear pick as forementioned drags start to dissipate. 

Of course, medical developments will be an important catalyst, in particular an effective COVID vaccine, which would pave the way for an eventual recovery in international travel and migration, a sustained rally in confidence and – fingers crossed – an end to major virus disruptions.

As Victorians would no doubt agree, that’s something worth hoping for at an incredibly unpredictable time. 

The information in this article is general information only, it does not constitute any recommendation or advice; it has been prepared without taking into account your personal objectives, financial situation or needs and you should consider its appropriateness with regard to these factors before acting on it. Any taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice. You should also consider obtaining personalised advice from a professional financial adviser before making any financial decisions in relation to the matters discussed.

Matthew is a senior economist with Westpac. His specific areas of expertise are housing markets and the Australian consumer sector. Matthew’s research has been instrumental in shaping Westpac’s views on the Australian economy, including recent calls on official interest rates. His research has provided important insights into housing market developments and the behaviours of the Australian consumer. He is the author of Westpac’s monthly Red Book report, regards as essential reading on the consumer sector. Before joining the Westpac team in 2007, Matthew held senior positions with leading economic consultancies in Australia and New Zealand.

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