1 April 2020
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Does this post-election ScoMo rebound have legs?

Peter Switzer
12 June 2019

We received our best piece of economic news in some time and you can only hope with the monthly Westpac consumer sentiment number out today that the post-election ScoMo rebound continues to have legs. That news was the big bounce in business confidence from the monthly NAB survey.

This picture paints a thousand words:

Look at the trending slide of confidence over 2018 that intensified as we got closer to election day on May 18. Now look at that bounce! That’s a ripper but it’s early days and you can’t get carried away with one month’s figures. However, it’s a nice start.

This is how CommSec’s chief economist Craig James saw the number: “The ‘new economy’ began on May 19,” he declared. “And while business conditions were never going to bounce immediately after the election, the sharp lift in business confidence is encouraging. Especially encouraging was a lift in the employment sub index back to levels in line with the long-term average or ‘normal’ level.”

The team at Trading Economics was less convinced about the bounce in confidence, guessing that “the latest reading could be short-lived, as business conditions weakened (-2 points to 1), with both sales (-5 points to 3) and profitability (-4 points to -3) falling while employment rose (+3 points to 2). Also, forward orders dropped further (-1 point to -3), exports were unchanged (at -1); and capacity utilisation decreased to below its average (80.9% vs 81.1%).”

Against that you could argue that the negative business conditions versus the positive business confidence reading is a case of the future looks better than the past. However, we need to see a run of good economic news to ensure this confidence comeback is maintained. That puts enormous pressure on the PM Scott Morrison, his Treasurer Josh Frydenberg and, of course, the US President Donald Trump has a role to play.

Business Confidence in Australia averaged 5.93 index points from 1997 until 2019, reaching an all-time high of 21 index points in April 2002 and a record low of -30 index points in October 2008.

Another post-election piece of good news has to be the stock market spike since May 18. We’re up about 3% since the shock poll result and that includes a Wall Street worry period when Mr Trump escalated trade war talk with China and embarked on his Mexican standoff, which ended over the weekend. This helped to explain the 102-point surge in the S&P/ASX 200 index yesterday.

That trade war has put the Fed and global central banks on a ‘clear and present danger’ stance, where they’re prepared to cut interest rates if this trade war looks set to create a global recession. This collective fear, that I think pushed our Reserve Bank to cut the official cash rate to an historical low of 1.25 last week, has given stock market players a lot of positivity, which could easily work to create the positivity snowball that could save the global, the US and our economies from the recession we didn’t have to have!

If there are no huge sell offs of stocks linked to a trade war and central banks aren’t of the mind to raise interest rates, and governments like ours are looking at tax cuts on top of interest rate cuts along with infrastructure spending (promised in the Budget as well as in the election campaign), then this could be the start of something good.

With the debt levels worldwide and locally that quite rightly worry many serious-minded people, it’s crucial to get good levels of economic growth. Lending big time to a company with falling sales is risky but lending to a business on the way up reduces the concerns of relatively higher debt levels.

Australia carries a lot of debt — it always has because we don’t have a big population, so our saving levels are low. But we have an economy that punches miles above its weight and that’s why we have gone 28 years without a recession, which is a world record.

Let’s be honest, we’re still in the economics ‘woods’ but we are on the right track to get back on track, where we can see economic growth, wage rises and job creation. But we do need a little bit of help from one Donald J. Trump.

I’m hoping that today’s Westpac consumer sentiment number shows that consumers are experiencing the post-election ScoMo confidence comeback that business is displaying.

Bad news is bound to be revealed in coming months but let’s hope that these are telling us about yesterday and not tomorrow. I’ll be looking at forward indicators more seriously rather than those that tell me about the past.

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