How does business confidence compare to levels 12 months ago?
It’s not doing too badly. One of the common measures we look at is the NAB Business Survey and the confidence reading there actually got a bit of a boost around the time of the election; it then came off a little bit more recently but it has managed to hang up at a reasonable level. All in all, business confidence is up on where it was a year ago but it’s probably given up half the boost we saw from the election.
What has caused this loss of business confidence since the election?
I think it’s due to a number of things. Often elections provide optimism that change will result in a better economic scenario and of course after the election, businesses and people in general realised it’s actually a bit of a hard slog and there are some tough patches in there. The Budget had a bit of a negative impact too but not much. The Budget had more of an impact on consumer confidence rather than business.
I think that after the election-related honeymoon there is a realisation that there is going to be a long hard slog to reform the economy and so even though there is a bit more optimism around on the part of business it’s a long way from boom conditions and the underlying economic conditions are somewhat mixed as well. Some parts look like they are going to do really well whereas other parts are still trying to pick up.
What sectors are most confident? Which sectors are lacking confidence?
Housing-related construction – confidence levels there have really picked up. Mining has come off the top as you would expect, confidence in the mining sector was very high but the combination of lower commodity prices – particularly lower iron ore prices – and the still high Australian dollar have weighed on confidence in that part of the economy quite a bit. Retailing is a bit mixed. Confidence there is a bit higher than it was a year ago but retailers are still wary of things and it’s hard to say that retail sales are onto a sound footing just yet; they are better than they were but there is still a fair way to go. Everything else seems to be a bit in between. Services for example – confidence there is just okay.
How closely is consumer confidence and business confidence related?
They normally track quite closely but consumer confidence is not necessarily a leading indicator. A lot of the time they are contemporaneous. Coming out of the GFC it was business confidence that started to rise sharply earlier, then the peak of confidence in 2010, before they both turned at the same time, and then of course as we went into the election last year they both rose at the same time.
Consumer confidence has been hit harder because most of the measures in the Budget were aimed at consumers – cutting back on welfare, tax hikes, cutback in unemployment benefits – all the sorts of things aimed at consumers as opposed to businesses.
There is a debate at the moment whether consumer confidence, which is running a lot lower than business confidence, will drag down business confidence via a lack of demand. Time will tell on that one and it depends on how quickly the consumer confidence measure bounces back. If it bounces back quickly and spending holds up in the economy then I suspect the business confidence measure will just stay around where it is and the consumer measure will just come up to where business confidence is. But if consumer confidence takes longer to bounce back then I suspect that business confidence is vulnerable to a decline because spending will weaken. So far the evidence points in the direction of the former: the Roy Morgan weekly survey of consumer confidence has recovered more than all of its post-Budget related loses and that suggests that the more widely followed Westpac-Melbourne Institute measure of consumer confidence, which is monthly, will probably grind higher over time – so that might end up supporting business confidence.
What do you expect to impact business confidence in the coming 12 months?
I guess there are several things I’d nominate: the Budget, interest rates and the dollar, and of course the usual flow of information globally. The first one is how the Budget is resolved and whether the likely failure of the government to get many of the welfare cutbacks through the Senate could result in tougher conditions for business. Also, sometime in the next 12 months the Reserve Bank will probably start to raise interest rates again so that could be a bit of a drag, but at this stage I think that’s a far way off though.
The Australian dollar is a critical one. Lately it looks as though it’s starting to fall again so if the Australian dollar does trend downwards that would be a huge boost to business confidence because most businesses benefit from a lower Australian dollar. It’s great for tourism, manufacturers, and it means less people are shopping online, which is good for retailers and it’s certainly good for mining companies.
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