Maxim Monthly Insights - April 2016

• The Australian economy continues to defy the doomsayers with businesses reporting increased confidence and conditions. 
• That’s continuing to drive strong employment outcomes throughout the economy with more Australians in work than ever before. 
• That strength in employment will act as a salve to weak consumer confidence which likely reflects political and market uncertainty more than consumers own fears about their outlook.

Australian business is saying the Australian economy is SOLID

For the second month in a row the signs are that the Australian economy is again defying the doomsayers and continuing to grow. Of course it’s not the strong growth we used to see in the pre-GFC era. Behaviourally that's one reason why people in the economy can sometimes feel like the economy is weaker than it could be. The behavioural psychologists would say they are “anchored” on growth that was higher but no longer relevant.  But as I discussed last month nominal growth is around its long run average – goldilocks would be pleased. Perhaps not too hot. But certainly not too cold.

Recently though as the Australian dollar rallied hard from the year’s low at 0.6850 against the US dollar to 0.7700, a gain of 11%, fears have grown that it could derail the economy, its growth and its transition.

Indeed RBA Governor Stevens noted in his statement after this month’s board meeting that “under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy”. Not only did that suggest rates could be lowered again many took it as a sign that the economy was weak.


But the release this month of the NAB’s authoritative Business survey suggests that if the Aussie dollar’s rally is complicating the recovery it hasn’t done so yet. The NAB survey showed an improvement in both business conditions, which rose from 8 to 12, and business confidence which came in at 6 from last month’s print of three.

NAB chief economist Alan Oster was falling over himself with ebullience at the data.

"The lift in business conditions to these levels not only suggests that Australia is withstanding the uncertainty offshore, but that the recovery in the non-mining sectors of the economy have in fact stepped up a gear this month," Oster said.

Likewise, the employment sub-index in the NAB survey was the strongest it’s been in years.  That’s important because employment data for March again showed that a solid increase in jobs of 26,100 for the month. That saw the unemployment rate hit a 3-year low of 5.7%. It also means that there are more Australian’s in work now than at any stage in the country’s history.

That should act as a salve against recent falls in consumer confidence.

Consumers downbeat, but don’t worry.

While Australian businesses are reporting strong conditions and confidence, Australian consumers feel like they are again under pressure. That’s seen a mini-collapse in consumer confidence/sentiment over the past month from both the ANZ weekly and Westpac monthly indexes.  

This month the Westpac-MI consumer sentiment index sliding 4% to 95.1. When the index is below the 100 level the number of pessimists outnumber optimists. And at 95.1 the index is at the lowest level seen since September 2015 — when Malcolm Turnbull took over as prime minister with a pledge to restore the nation’s confidence.

Underlining the scale of the deterioration seen over the month, it was also the largest monthly percentage decline in the past seven months. It also left the index down 6.4% since November 2015. Sentiment towards family finances compared to a year ago slid 3.8%, outpaced by a 6.6% slump in expectations for the year ahead. Likewise, confidence towards the economic outlook also took a hit with the subindices tracking sentiment looking one and five years ahead falling 5.5% and 5.9% respectively.

The reason for the fall in confidence is pretty clear, financial markets remain volatile and Australia’s fractured politics is likely also weighing according to the ANZ’s own confidence survey. It’s usual for the economy to slow in an election campaign. The uncertainty associated with the outcome usually causes businesses to defer non-essential investment and consumer to slow the purchase of discretionary items.

That’s likely where we are now. But business owners shouldn’t worry too much. That’s because Australian consumers have a history of reporting weak confidence but then still acting as if things aren’t that bad after all.

The strong counter balance to weaker confidence is jobs. More Australians working than ever before means more Australians taking home a pay packet and more Australians spending as a result. That means it's also important that the Westpac survey showed a decline in the unemployment expectations index. That indicates that consumers are more confident around the outlook for the unemployment rate. Behaviourally it means they’ll be less worried about spending because they know – or believe – the chances of losing their job is low. That’s the key.


Aussie dollar rally and the RBA

The RBA isn’t keen on the Aussie dollar rallying too much further. That’s because it’s a relatively weak currency, compared to recent years where the Aussie was in the high 80, low 90 cent region has provided a boost to growth. Indeed, investment bank Morgan Stanley wrote this month that “Net trade has added an average of 1.5% to GDP in the last two years”. So they are worried that a strong Aussie will hurt “labour-intensive services exports (such as tourism)”.

That’s how a weaker currency works.

But as RBA governor Stevens has said many times recently, “not everyone can have a weak currency at once”. So there is a risk the Aussie could rally to 78 cents, perhaps even 81 cents.

If that does happen then regardless of the strength in business sentiment the chances of an RBA rate cut will surge.  

Tying it all together: It’s been 15 years since a recession in Australia. The chances of one anytime soon continue to be small. That’s not to say there aren’t pockets of weakness in the transitioning economy. But for the most part strong employment and business conditions will continue to underpin growth. Even if it is lower than what many companies would like.
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