tag:theconversation.com,2011:/global/topics/business-confidence-7397/articlesBusiness confidence – The Conversation2023-06-29T11:00:05Ztag:theconversation.com,2011:article/2084962023-06-29T11:00:05Z2023-06-29T11:00:05ZThe Johnson/Truss debacle of 2022 made people more afraid of starting businesses – new findings<p>The UK picked a bad year to have a political crisis in 2022. The markets were already jittery because the global economy was struggling to recover from COVID. The war in Ukraine drove up energy costs, leading to high inflation and a cost of living crisis in many developed economies. In the UK, these pressures had combined with the effects of Brexit to <a href="https://www.enterpriseresearch.ac.uk/the-cost-of-doing-business-2022q2-data-from-the-small-business-price-index/">sharply raise</a> the cost of doing business. </p>
<p>Then, in early July, Boris Johnson was <a href="https://theconversation.com/boris-johnson-resigns-as-prime-minister-heres-who-could-replace-him-186578">forced to resign</a> as prime minister, ushering Liz Truss into office. Her administration’s inaugural budget in September led to an economic shock as markets gave their judgement overnight. On the back of this, <a href="https://economictimes.indiatimes.com/news/international/business/uk-business-confidence-at-lowest-since-covid-lockdown/articleshow/95214510.cms?from=mdr">business confidence collapsed</a>.</p>
<p>This was the backdrop to our annual <a href="https://www.enterpriseresearch.ac.uk/global-entrepreneurship-monitor_-gem/">Global Entrepreneurship Monitor 2022</a> (Gem) survey. We surveyed just over 10,000 people in the UK between June and late September (3,000 phone interviews and 7,000 web surveys). We found the UK was in the midst of an uncertain summer that made people less inclined to start businesses. The nation has duly lost ground in the entrepreneurial stakes to rival economies, though there are a few positives buried in the data as well. </p>
<h2>The Johnson/Truss effect</h2>
<p>By the time we had finished our first 2,000 phone interviews by late June 2022, <a href="https://www.gemconsortium.org/reports/latest-global-report">12.9% of respondents</a> were in the early stages of starting businesses. Once we had concluded our fieldwork in September, the rate of entrepreneurship among all 10,000 respondents was 11%, suggesting it declined over the summer. </p>
<p>If we just compare the phone interview statistics to factor out any potential variations in how people answer the two types of survey, it’s even more compelling. The final 1,000 phone interviewees in the weeks after Johnson had resigned showed an entrepreneurship rate of just 7.4%. This is hardly surprising as the relentlessly negative headlines about the state of politics and the economy filtered through to people’s economic choices. </p>
<p>This self-inflicted wound by the party of government also means the country’s entrepreneurship trend diverged from the US, France and Germany. Those countries have all seen sharp increases in early-stage entrepreneurial activity following the pandemic. The UK experience paints a depressing picture of how easy it is to shake the confidence of potential entrepreneurs. </p>
<p><strong>Adults setting up businesses by country, 2002-22 (%)</strong></p>
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<a href="https://images.theconversation.com/files/534539/original/file-20230628-17-gy79qj.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph showing proportions of adults setting up businesses in different countries" src="https://images.theconversation.com/files/534539/original/file-20230628-17-gy79qj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/534539/original/file-20230628-17-gy79qj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=336&fit=crop&dpr=1 600w, https://images.theconversation.com/files/534539/original/file-20230628-17-gy79qj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=336&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/534539/original/file-20230628-17-gy79qj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=336&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/534539/original/file-20230628-17-gy79qj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=422&fit=crop&dpr=1 754w, https://images.theconversation.com/files/534539/original/file-20230628-17-gy79qj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=422&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/534539/original/file-20230628-17-gy79qj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=422&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><span class="source">Global Entrepreneurship Monitor</span>, <span class="license">Author provided</span></span>
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<p>There is also evidence in our 2022 survey that adults are feeling less entrepreneurial in the UK than previously. The proportion of working-age adults not already running businesses who saw good opportunities for starting one fell year on year from 48% to 37%. In France, it remained the same at 52%, while Germany saw a drop of eight percentage points to 40%.</p>
<p>As the next graph shows, the UK’s fall in entrepreneurial spirit (orange line) is comparable to previous periods of economic uncertainty like the 2008 global financial crisis and the early months of the COVID pandemic in 2020. Coupled with this, the fear of failure among those who still see good business opportunities (yellow line) remains at an all-time high.</p>
<p><strong>UK perceptions of business opportunities, 2002-22</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/534540/original/file-20230628-15-cc6ueo.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph showing perceptions of business opportunities" src="https://images.theconversation.com/files/534540/original/file-20230628-15-cc6ueo.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/534540/original/file-20230628-15-cc6ueo.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=356&fit=crop&dpr=1 600w, https://images.theconversation.com/files/534540/original/file-20230628-15-cc6ueo.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=356&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/534540/original/file-20230628-15-cc6ueo.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=356&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/534540/original/file-20230628-15-cc6ueo.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=447&fit=crop&dpr=1 754w, https://images.theconversation.com/files/534540/original/file-20230628-15-cc6ueo.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=447&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/534540/original/file-20230628-15-cc6ueo.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=447&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Orange = ‘There are good start-up opportunities where I live in next six months.’; Yellow = ‘There are good opportunities, but fear of failure would prevent me starting a business.’</span>
<span class="attribution"><span class="source">Global Entrepreneurship Monitor</span>, <span class="license">Author provided</span></span>
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</figure>
<h2>More bad news and a couple of positives</h2>
<p>Our survey has been measuring the entrepreneurial activity of working-age adults in a wide range of countries in a comparable way since 1999, making it one of the longest-standing efforts at tracking these trends globally. The Gem surveys began as a joint research project between Babson College in the US and London Business School in the UK. As many as 49 countries participated in the most recent survey, with national teams composed of different academic institutions leading the data-gathering in each country. </p>
<p>The UK’s ranking in the overall quality of its entrepreneurship ecosystem also fell to 25th in 2022 from 18th the year before. This is assessed based on a survey of 36 entrepreneurship experts on 13 parameters, such as financing and physical infrastructure. In nine out of the 13 parameters, the UK was downgraded in 2022.</p>
<p>There are several silver linings. The proportion of women in the UK starting up businesses compared to men was 78% in 2022, an increase of five percentage points from the previous year. In the context of the overall discontent, this rise suggests that female entrepreneurship is quite resilient in the UK. For comparison, the equivalent figure is 65% in France and Germany and 89% in the US.</p>
<p>We also observe a continuation in the long-term trend of entrepreneurial activity among immigrants in the UK (13.7%) being higher than that of life-long residents (8.7%). The same is true of entrepreneurial activity among the non-white population, which was 16.2% compared to 10.2% among white people. </p>
<p>Nonetheless, the political uncertainties in the UK clearly harmed business confidence and, in turn, entrepreneurial activity. The way to avoid this is to ensure that government policy does not change drastically between prime ministers. We also need UK business-support initiatives to continue, like the <a href="https://helptogrow.campaign.gov.uk/">Help to Grow</a> programme, <a href="https://www.lepnetwork.net/local-growth-hub-contacts/">Growth Hub</a> network and <a href="https://www.gov.uk/government/organisations/innovate-uk">Innovate UK</a>. </p>
<p>As for the period since the end of our 2022 survey, the rate of entrepreneurial activity may well have further declined. This would make sense in view of the continuing cost of living crisis, with its combination of sticky inflation and rapid rises in interest rates. Until more people feel like starting businesses again, the downturn is probably grinding on – with an unhelpful push in the wrong direction from the government.</p><img src="https://counter.theconversation.com/content/208496/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Hart receives funding from the Department for Business and Trade; Welsh Government; Department for the Economy in Northern Ireland; NatWest Group to aid the collection of the GEM data each year but all views are his own. . </span></em></p><p class="fine-print"><em><span>Sreevas Sahasranamam does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Global Entrepreneurship Monitor 2022 has some sobering data for the UK government.Mark Hart, Professor of Small Business and Entrepreneurship, Aston UniversitySreevas Sahasranamam, Senior Lecturer in Entrepreneurship and Innovation, University of Strathclyde Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1009792018-08-03T12:57:39Z2018-08-03T12:57:39ZChanges to the Constitution may boost, not weaken, South African property rights<figure><img src="https://images.theconversation.com/files/230550/original/file-20180803-41338-rqc54y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South African President Cyril Ramaphosa is walking a tight on land reform.</span> <span class="attribution"><span class="source">GCIS</span></span></figcaption></figure><p>The South African government’s plan to <a href="https://www.timeslive.co.za/politics/2018-07-31-anc-to-change-constitution-to-expropriate-land-without-compensation/">change the constitution</a> to mention land expropriation without compensation could, ironically, end up strengthening the property rights on which investment depends. </p>
<p>Pressure to change the Constitution to allow the government to expropriate land without compensation is currently the country’s most contentious issue. Supporters insist that the measure is essential to end racial land ownership patterns which continue to favour whites a quarter century after the end of apartheid. Critics insist that this will threaten property rights and choke off investment. </p>
<p>President Cyril Ramaphosa has now announced that the governing African National Congress will support a change to the constitution’s property clause. This was greeted with predictable <a href="https://www.fin24.com/Markets/Currencies/big-blow-for-rand-economy-as-anc-set-to-change-constitution-on-land-20180801">anxiety</a> among pro-business commentators. But their fear that the change will weaken property rights seems misplaced. To see why, we must look at what property rights are, what the constitution says and what Ramaphosa and the ANC leadership may have in mind.</p>
<p>Much of the fear seems based on a view of property rights which sounds credible but does not describe reality in market economies. It sees property rights as the right to do whatever you like with what you own. The philosopher <a href="https://www.amazon.com/Property-Mainstream-Positions-C-B-MacPherson/dp/0802063365">CB MacPherson</a> pointed out four decades ago that this is not how property was understood until fairly recently, and not how property rights actually operate. </p>
<p>There is no unlimited right to property anywhere. People who own homes cannot use them to make banned substances or to fire missiles at neighbours. People who own factories cannot use them to enslave labourers or to pump poisons into the air and water. If owners ignore these rules, they will be forced to give up some of their property. Some might even lose the property – think of restaurant owners whose businesses are closed down by health authorities to protect consumers.</p>
<p>None of this is inconsistent with a market economy. On the contrary, these rules are essential to markets. A good analogy is a set of traffic lights. They limit what car and truck owners can do with their property, but they are essential to keeping the property safe.</p>
<p>The property rights of owners are, therefore, strong enough to allow them to invest with confidence when they know what the rules are which decide whether they keep their property. </p>
<p>Certainty is the key – not a blank cheque.</p>
<h2>The Constitution</h2>
<p>Section 25 of the South African Constitution, which is often held up by friends and foes as a cast-iron guarantee of property rights, is nothing of the sort. It does say the state can expropriate property only if it pays compensation and lists criteria which courts must take into account when deciding compensation. But clause (8) says: </p>
<blockquote>
<p>No provision of this section may impede the state from taking legislative and other measures… to redress the results of past racial discrimination</p>
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<p>That’s if it complies with Section 36(1) which says the measure must be:</p>
<blockquote>
<p>reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom.</p>
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<p>So the Section does allow expropriation without compensation – but the wording spelling out when it is allowed is vague. If the government were to test this in court, different judges would inevitably come to different conclusions. This gives owners no certainty and so they don’t know whether their property is safe.</p>
<p>If the constitution is changed to make clear which property may be expropriated without compensation, property rights would be stronger because it would be clear to owners whether their property is safe and what to do to keep it that way.</p>
<p>This is what Ramaphosa and his party say they have in mind. His announcement did not say the constitution should be changed to allow expropriation without compensation – he said that it already does this. The aim, he said, was a clause which “outlines more clearly the conditions under which” land can be expropriated without compensation – in other words, to provide the clarity the current clause lacks.</p>
<p>If he makes good on his promise, the effect will be to strengthen property rights by making it much clearer when the state can take land without compensation. The wording of the clause will be crucial – if it’s too vague and allows the state too much latitude, it will not strengthen property rights. But it’s unlikely that it will seriously threaten these rights because this would place the property of every home-owning ANC voter at risk.</p>
<h2>Ramaphosa’s change of view</h2>
<p>But, whatever the effect of this particular change, a look at why Ramaphosa made the announcement shows that the right to property in South Africa will be challenged until and unless inequality and economic exclusion are tackled far more vigorously than they are now.</p>
<p>He clearly did not want to change the constitution. After a previous ANC summit on land issues, in May, it insisted that it would not change the constitution. It would, rather, pass an <a href="https://www.businesslive.co.za/bd/politics/2018-05-22-anc-may-bolster-bill--for-land-seizures-without-compensation/">Expropriation Bill</a> and test whether the land redistribution it planned was possible within the current wording. </p>
<p>His <a href="https://probonomatters.co.za/2018/08/ramaphosa-our-people-want-the-constitution-be-more-explicit-about-expropriation-of-land-without-compensation/">announcement</a> this week sounded reluctant: he said that the current constitutional wording does allow expropriation without compensation and then insisted on the need to change it – there was no logical connection between the two. </p>
<p>This strongly suggests that he was forced to change position. Since the change came after a meeting called by the ANC’s National Executive Committee, it was surely pressure from this body which forced a change. This is confirmed by a <a href="https://www.businesslive.co.za/bd/national/2018-08-02-anc-aims-for-explicit-clarity-in-land-law/">report</a> claiming that he shifted because the faction within the National Executive Committee which supports former president Jacob Zuma is using the land issue to embarrass him and his faction.</p>
<p>It’s easy to see why Ramaphosa and his allies had no answer to this. Inequality and economic exclusion remain deeply entrenched – the well-off are no longer all white but the poor are still almost all black. </p>
<p>Many black professionals and business people believe the economy is still controlled by the white minority. Given all this, no politician whose support base is overwhelmingly black can deny the need for change without facing the same ridicule as Congress of the People leader <a href="https://www.businesslive.co.za/bd/national/2018-07-12-whites-bought-their-land-says-cope-leader-mosiuoa-lekota/">Mosiuoa Lekota</a>, whose opposition to land expropriation has politically isolated him . </p>
<h2>Realities need to change</h2>
<p>South African economic realities mean that rejecting economic change is simply not an option for politicians who seek a large black support base. It will be hard for them to insist on strong safeguards for property when many of their voters do not own any.</p>
<p>The obvious way to change this is to change these realities – to begin to negotiate economic changes which will open the mainstream economy to millions who now languish on its fringes while securing property rights for all.</p><img src="https://counter.theconversation.com/content/100979/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Friedman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Clarifying when and how the South African constitution allows for expropriation of land without compensation will strengthen property rights.Steven Friedman, Professor of Political Studies, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/870992017-11-09T19:20:21Z2017-11-09T19:20:21ZVital Signs: business conditions are peachy, so why aren’t businesses investing?<p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
<p><em>This week: interest rates remained on hold as housing finance fell to a new low, conditions remain good for business, but they’re still not investing, and the US economy will likely miss Janet Yellen.</em></p>
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<p>On Melbourne Cup day, the RBA kept interest rates on hold at 1.5%, yet again. And why wouldn’t it?</p>
<p>There has been some progress in curtailing the runaway housing market, inflation is still low, and upcoming changes to the way inflation is measured seem set to push it lower than it would otherwise have been.</p>
<p>The Australian Bureau of Statistics (ABS) will now put more weight on rent and utilities and less on food and non-alcoholic beverages, beginning in December. Macquarie Securities analyst <a href="http://www.smh.com.au/business/the-economy/abs-tweak-has-big-impact-on-interest-rates-inflation-20171106-gzfzzc?deviceType=text">Justin Fabo suggested</a> this would have lowered the September quarter CPI by 25 basis points if the new method had been used.</p>
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Read more:
<a href="https://theconversation.com/explainer-why-some-economists-think-the-rba-should-drop-its-inflation-target-64265">Explainer: why some economists think the RBA should drop its inflation target</a>
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<p>Moreover, with Amazon set to enter Australia – and the Australian Competition and Consumer Commission <a href="http://www.huffingtonpost.com.au/2017/11/04/amazon-will-be-able-to-legally-set-super-low-prices-and-undercut-local-competition_a_23266601/">blessing its ability to charge low prices</a> without running afoul of competition laws – there could be more downward pressure on inflation. Note to ABS: put online shopping properly in the CPI basket!</p>
<p><a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/5609.0">ABS figures released Thursday</a> showed that housing finance for September fell 3.6% to A$32.5 billion (in seasonally adjusted terms) – the lowest it has been since April. In fact, the year-on-year level is unchanged. </p>
<p>Investor loans were down sharply, 6.2%. This appears to be connected to the Australian Prudential Regulation Authority’s regulatory clamp-down on interest-only loans. If this tightens credit growth relatively slowly, it could help the housing market from getting further out of control. But there’s a lot more evidence needed to feel comfortable that’s what we’re witnessing.</p>
<p>Meanwhile, on the business side, <a href="https://business.nab.com.au/nab-monthly-business-survey-september-2017-26604/">the NAB business conditions index</a> held steady at a robust +14 points.</p>
<p>NAB’s Chief Economist, Alan Oster, said: </p>
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<p>Business conditions at these levels tell us that the business sector in Australia is doing very well. We have certainly seen that reflected to some degree in areas like corporate profits and jobs growth, but other aspects of the economy – such as business investment – have been somewhat disappointing in comparison. In that context, it will be important to keep an eye on the recent softer trend in business confidence.</p>
</blockquote>
<p>And there’s the rub. “Conditions” isn’t the same thing as “confidence”. </p>
<p>Conditions are pretty good for business: low interest rates, low inflation, relative financial stability. But a weak consumer side has for a long time been related to sluggish business investment and a pronounced lack of confidence. As Oster put it:</p>
<blockquote>
<p>Limited pass-through of lofty business conditions to the broader economy could be signalling ongoing risk aversion and a preference to use profits for balance sheet repair. Additionally, our previous concerns around the consumption outlook remain well entrenched, especially following very poor retail sales in August and stubbornly weak retail conditions in the NAB Survey.</p>
</blockquote>
<p>The main news overseas was the much anticipated announced of Jay Powell as chair of the US Federal Reserve. Although Powell is a solid choice – and much better than some of the loopy possibilities that were floated by the Trump White House – it is certainly sad that Janet Yellen not be reappointed.</p>
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Read more:
<a href="https://theconversation.com/trump-picks-safe-choice-to-lead-the-federal-reserve-6-questions-answered-86661">Trump picks 'safe' choice to lead the Federal Reserve: 6 questions answered</a>
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<p>Yellen has done an extraordinary job as a steward of the US economy. Among other things, she held her nerve in keeping interest rates low to help the economy recover, despite all kinds of bed-wetting from inflation hawks who were convinced that low rates would lead to an inflation spiral.</p>
<p>Yellen seemed to understand better than anyone that we were living in a new economic era in which inflationary pressures were much more muted than they have been in the past – even with very low measured unemployment, such as 4.1% in the US.</p>
<p>She also advocated a relatively hard line on financial regulation, while signalling openness to reconsidering parts of <a href="https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp">Dodd-Frank</a>. This is the area where Powell needs to be watched. Will he go along with slashing financial regulations and opening up the possibility of another financial crisis?</p>
<p>Let’s hope not – but with Yellen we knew for sure.</p><img src="https://counter.theconversation.com/content/87099/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>Business conditions aren’t translating to confidence, despite growing profits and jobs.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/854062017-10-15T10:23:43Z2017-10-15T10:23:43ZCorruption in South Africa: business leader answers questions on how bad it is<figure><img src="https://images.theconversation.com/files/190147/original/file-20171013-11677-8cn7c1.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Business Leadership South Africa new CEO, Bonang Mohale, is leading a brave fight against corruption. </span> <span class="attribution"><span class="source">Supplied by BLSA</span></span></figcaption></figure><p><em>Business Leadership South Africa, the biggest business lobby group in the country, has become increasingly <a href="https://www.ujuh.co.za/bonang-mohale-becomes-blsa-ceo-what-does-it-mean/">vocal</a> about rising levels of corruption and mismanagement of public assets. <a href="https://theconversation.com/why-patronage-and-state-capture-spell-trouble-for-south-africa-64704">Concerns</a> have been growing in the country that corrupt practices, particularly the looting of state assets, has become embedded in the way business is done. As the organisation – which represents large businesses and multinationals in South Africa – takes on a new political posture, Steven Friedman put questions to its CEO <a href="https://www.blsa.org.za/news-and-articles/media-statements/blsa-appoints-bonang-mohale-as-ceo/">Bonang Mohale</a>.</em></p>
<p><strong>How representative is Business Leadership South Africa of the country’s private sector?</strong></p>
<p>The organisation represents around 75% of the largest businesses in South Africa. Clearly their interests are not identical to those of smaller businesses. Big business, for example, is able to adapt to onerous government edicts which drive up the cost of business much easier.</p>
<p>But what we have in common is much greater than what separates us – namely the desire to have growth-fostering economic policies under the rule of law. Right now business confidence in South Africa is at a 30-year low due to factors beyond our control but also due to actions that we can control, such as government bringing more policy certainty in areas such as mining for example– this is disastrous for large and small business alike.</p>
<p>BLSA has committed its members to changing practices which might impede economic growth and inclusion. </p>
<p><strong>Are your members buying the change agenda? How do you plan to ensure that they endorse it?</strong></p>
<p>Yes they are. Business Leadership South Africa has taken a much more active role over the last year in terms of getting the voice of business better heard, shaping government policy and speaking out against corruption. We have requested significant resources to achieve this and our members have backed us. </p>
<p>They understand the critical importance of the issues we are dealing with – achieving a policy backdrop that will allow us to grow the economy, create jobs and deliver transformation. </p>
<p>In terms of endorsement, we have set out our vision in a <a href="https://www.blsa.org.za/business-believes/our-contract-with-south-africa/">Contract with South Africa</a>, and our <a href="https://www.blsa.org.za/business-believes/integrity-pledge/">integrity pledge</a>, which establishes our business values. We expect our members to honour these. If they are in breach, they cannot be members. We showcased our commitment to the contract and the pledge through the <a href="https://www.ujuh.co.za/blsa-suspends-eskom-and-transnet-membership-it-needs-to-be-consistent/">suspension</a> of three major corporations KPMG, Eskom and Transnet. </p>
<p><strong>You’ve suspended Eskom and Transnet due to what you say is behaviour at odds with the organisation’s values. What do you mean by this?</strong></p>
<p>The integrity pledge makes clear that we have a zero-tolerance policy on corruption. There is a lot of <a href="http://www.huffingtonpost.co.za/2017/06/01/the-new-gupta-emails-are-a-lot-heres-what-they-say-in-5-quick_a_22120706/">prima facie evidence</a> that both of these organisations have been involved in corrupt conduct. They were not able to satisfy us that they recognised the seriousness of the charges and were determined to address them. So the suspension of their membership was appropriate.</p>
<p><strong>There is a view that Business Leadership South Africa is tougher on public sector corruption and lenient where the private sector is concerned. What’s your view?</strong></p>
<p>This is not true. Where there have been instances of bad behaviour in the private sector, accountability has followed. For example, construction industry executives involved in rigging bids around the World Cup are no longer in office. More recently there’s been the case of KPMG. The executives responsible for the decisions that landed the firm in trouble have <a href="http://ewn.co.za/2017/09/15/kpmg-sa-ceo-chair-and-6-top-staff-resign-over-gupta-scandal">left</a>. And it’s been <a href="https://mg.co.za/article/2017-09-22-blsa-hits-out-at-kpmg">suspended</a> from BLSA. </p>
<p>By contrast, in government and state owned enterprises there is no accountability. Executives behave with impunity. And while corruption is wrong wherever it occurs, we must resist the spurious symmetry of discussing public and private sector corruption as though South Africa is facing a problem of equal gravity in both. Unfortunately, we now have a government that is corrupt from top to bottom. By contrast we have a private sector that is overwhelmingly law abiding. That is a very significant difference.</p>
<p><strong>How far are you prepared to take your anti-corruption mission? Some of your members have been found guilty of abusing vulnerable consumers. Will you act against them?</strong></p>
<p>Business Leadership South Africa will act against any member whose behaviour is against its own values and damages the reputation of business. These values are encapsulated in the organisation’s integrity pledge and the contract with South Africa. Taken together, these outline a zero tolerance attitude to corruption, a belief that business should behave with courage, integrity and consistency, and a strong belief that business can be a force for good.</p>
<p>Sometimes business will make mistakes and that can be accepted provided the organisation takes suitable action to address the problem.</p>
<p><strong>Do you accept that business itself needs to change its ways of doing business if it’s going to win public confidence in its mission against corruption?</strong></p>
<p>Yes, we do. There is clearly a large “trust gap” between parts of the public and business. Some of this is down to ignorance. Some of it can be explained by the deliberate misinformation as seen in the toxic <a href="https://theconversation.com/white-monopoly-capital-an-excuse-to-avoid-south-africas-real-problems-75143">White Monopoly Capital</a> campaign. As we now know this was a highly racialist narrative that sought to blame everything that’s gone wrong in South Africa on an imaginary lily white private sector. We believe this particular line of attack is being used to detract attention away from the real issue - which is increasing corruption.</p>
<p>And some of the mistrust is rooted in <a href="http://www.justice.gov.za/trc/media%5C1997%5C9711/s971110b.htm">history</a>, with business still regarded by many as having collaborated with the apartheid system and furthering its legacies. </p>
<p>But some of it is also attributable to business’s own behaviour including <a href="http://www.engineeringnews.co.za/article/construction-majors-fined-r146bn-for-collusion-2013-06-24">collusive conduct</a> in certain industries and <a href="https://www2.deloitte.com/za/en/pages/human-capital/articles/executive-compensation-report.html">inflated executive compensation</a>. </p>
<p>But business is a national asset, not the problem. So it is in everybody’s interest that the South African public improves its understanding of business, and its overall reputation. </p>
<p>Business needs to explain and demonstrate that it is part of society and does not stand apart. That it shares the same vision and goals, notably of combating the scourges of unemployment, inequality and poverty.</p>
<p>Business also needs to help society understand that the major problems the country is facing don’t just lie at its doorstep. Certainly, there are things business can do better, but the much larger problem is the havoc being wreaked by <a href="https://theconversation.com/why-patronage-and-state-capture-spell-trouble-for-south-africa-64704">state capture</a> and poor policy development and execution. </p>
<p><em>This is part of a series called Face-to-face that The Conversation Africa is running in which leading academics interview prominent individuals in the public, private and not for profit sectors.</em></p><img src="https://counter.theconversation.com/content/85406/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Friedman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Business Leadership South Africa has in the recent past assumed a stinging position against public sector corruption. Bonang Mohale explains the stance taken by the lobby group.Steven Friedman, Professor of Political Studies, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/822552017-08-10T20:07:08Z2017-08-10T20:07:08ZVital Signs: that feeling you get when the economy can’t be explained by economic models<figure><img src="https://images.theconversation.com/files/181624/original/file-20170810-20484-dvs8co.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">What if we're just not as predictable as we used to be?</span> <span class="attribution"><span class="source">Image sourced from shutterstock.com</span></span></figcaption></figure><p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
<p><em>This week: businesses seem confident, consumers less so, China trade slows, Australian housing finance flattens, and the US economy is growing but remains hard to call.</em></p>
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<p>Some good news this week on business confidence. The <a href="http://business.nab.com.au/nab-monthly-business-survey-july-2017-25783/">NAB monthly business survey for July</a> showed business conditions rising to the highest level since 2008. The business conditions index was at +15 “index points”, triple the long-run average. The business confidence index rose 4 points to +12.</p>
<p>There was a sting in the tail, however. NAB chief economist Alan Oster said: </p>
<blockquote>
<p>We remain apprehensive about how the disconnect between the business and consumer sectors will be resolved – especially in light of sluggish retail conditions in July. Additionally, the previously emphasised hurdles to growth – elevated underemployment, household debt and peaks in LNG exports and housing construction – remain firmly in place.</p>
</blockquote>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/young-educated-and-underemployed-are-we-building-a-nation-of-phd-baristas-53104">Young, educated and underemployed: are we building a nation of PhD baristas?</a>
</strong>
</em>
</p>
<hr>
<p>So why are businesses fairly confident when the consumer side of the economy looks downbeat? That’s a good and hard question – and I don’t know the answer. But a concerning one would be that businesses are confident for two reasons: the economy is bad enough that the RBA will have to keep interest rates low, and wage growth is so sluggish that profits will continue to get a boost.</p>
<p>In fact, consumer confidence looks to be getting worse. Not long after the NAB report was released, the Westpac-Melbourne Instute announced its consumer sentiment index fell from 96.6 to 95.5 last month. That marks a remarkable ninth month in a row that the index has declined.</p>
<p>One thing that should cast a further shadow over the Australian economy is the trade figures of our largest trading partner, China. Both imports and exports slowed in July, with imports growing at 11% compared to forecasts of 16.6%. Exports grew at 7.2% compared to forecasts of 10.9%.</p>
<p>Taken together these point to slowing domestic demand in the Chinese economy. On the one hand, this is to be expected over time – as developing economies get bigger their GDP growth rates tend to slow down. On the other hand, that’s hardly good news for Australia. After all, it was the massive ramp-up in the growth of the Chinese economy that drove the commodities boom.</p>
<p>We also learned that the CPI in China in July was up 1.4%, compared to expectations of 1.5%. This seems to reflect a response to monetary policy tightening by the Chinese government aimed at reducing the high levels of debt in the economy.</p>
<h2>Cooling the housing market</h2>
<p>There has been a different type of policy tightening in Australia in the last year, with APRA instituting so-called <a href="http://www.apra.gov.au/MediaReleases/Pages/17_11.aspx">macroprudential measures</a> to address aspects of the housing market. These have led to increases in interest rates for investors, among other things.</p>
<p><a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/5609.0">ABS housing finance figures for June</a> showed some evidence of these having effect. The value of housing finance for all dwellings was $32.93 billion, flat from the previous month. Yet owner-occupier loans were up 0.5% and investor loans down 0.9%.</p>
<hr>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-have-we-finally-reached-peak-house-prices-78519">Vital Signs: have we finally reached 'peak' house prices?</a>
</strong>
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<p>The main figure to come out of the US was consumer credit. It rose by US$12.4 billion in June compared to expectations of US$15.5 billion. It’s a little hard to know what to read into this. It could be that it reflects a genuinely stronger labour market and less need for credit, or it could be a sign of lower consumer confidence.</p>
<p>The slew of numbers across various major economies this week continue to suggest a mixed picture. Businesses in Australia are happy, consumers are sad. The Chinese economy is slowing, but may be getting its debt problem under control. The US economy is growing relatively strongly, but consumers are borrowing less.</p>
<p>All this again points to the fact that the macroeconomic models of the past no longer seem to capture the current economy. And that presents a significant challenge for policymakers.</p><img src="https://counter.theconversation.com/content/82255/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow,</span></em></p>The slew of numbers across various major economies this week continue to suggest a mixed picture.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/730512017-02-16T19:10:16Z2017-02-16T19:10:16ZVital Signs: business confidence spikes but uncertainty reigns<figure><img src="https://images.theconversation.com/files/157225/original/image-20170216-32706-w6k675.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The shift to part-time employment in the labour force has been going on for a long time now.</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
<p><em>This week: business confidence spikes, unemployment is flat, and the market gets ready for a US interest rate rise.</em></p>
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<p><a href="https://theconversation.com/vital-signs-the-case-of-the-missing-investment-72716">Last week</a> I outlined a provocative idea about why business confidence could be relatively high while investment levels remained low. If the <a href="http://news.nab.com.au/nab-monthly-business-survey-january-2017/">National Australia Bank Monthly Business Survey</a> for January – released this week – is to be believed then that idea will be tested in coming months.</p>
<p>NAB reported that its business conditions index was up 6 points to +16 (the long-run average is +5). And business confidence was up 4 points to +10.</p>
<p>NAB’s chief economist, Alan Oster, put it this way: </p>
<blockquote>
<p>“recent strength in the NAB Business Survey is consistent with an anticipated rebound in economic activity, following the very weak Q3 2016 National Accounts. With that said, a confluence of seasonal factors suggests it is unwise to get too carried away with the result just yet, especially as some key industries remain fairly weak. As for business confidence, we suspect the enthusiasm in financial markets has helped a lot. If sustained, confidence at these levels could see firms revise up their capital expenditure and hiring plans.”</p>
</blockquote>
<p>Will it? Let’s hope so. But quite apart from what I discussed last week about weighted average costs of capital, the uncertainty about energy prices and the bizarre dithering on company tax rates (both sides of politics agreed on a lower rate until a few months ago) point to businesses waiting before investing heavily.</p>
<p>On the consumer side, there was evidence of a modest increase in confidence. The Westpac-Melbourne Institute survey showed a 2.3% rise in consumer confidence in February. That put the index at 99.6 (recall that 100 is break-even between optimists and pessimists). So the glass is almost half full.</p>
<p>On a related matter, car sales were up too, despite 2016 being a record year. 84,910 new cars were sold in January, up 0.6% on the same month last year.</p>
<p>The ABS released employment data on Thursday showing a basically flat labour market. Nothing too bad, nothing too good. Trend employment (which smooths out monthly gyrations – or, given that this is the ABS, radical mismeasurement) increased by 11,700 persons to 11,984,300 persons. This was split roughly evenly between full- and part-time employment.</p>
<p>The trend unemployment rate was unchanged at 5.7% and the trend participation rate stayed at 64.6%.</p>
<p>It is worth noting, however, that employment growth was 0.8% year on year – compared to the long-run average of 1.8% over the past two decades. Given population growth, this isn’t great.</p>
<p>General Manager of ABS’ Macroeconomic Statistics Division, Bruce Hockman, also noted that “there are now around 129,800 more people working part-time than there were a year ago, and around 40,100 fewer people working full-time”.</p>
<p>This shift to part-time employment has been going on for a long time now, reflecting a desire on the part of employers for more flexible work arrangements. This, of course, contributes to insecurity for households, but also speaks to the structure of labour market arrangements in Australia.</p>
<p>Inflation in China was stronger on both the consumer and producer side. The CPI
was up 2.5% in January, up from a 2.1% rise in December, and slightly ahead of analyst expectations of 2.4% (according to a Reuters poll). The Producer Price Index (PPI) was up 6.9% – the fastest for over five years – and accelerating from December’s 5.5% rise.</p>
<p>In the crazy, topsy-turvy economic times in which we live this is good news – pointing to increased global economic activity.</p>
<p>Federal Reserve Chair Janet Yellen completed two days of testimony to the Senate and then the House. Like all good testimony, she said very little that was new, and nothing vaguely controversial.</p>
<p>Most analysts expect the Fed to raise rates multiple times this year, and the reaction to Yellen’s testimony provided further confirmation of that. Prior to her testimony markets (based on the futures market for Fed funds) had factored in a 30% chance of a cumulative 75 basis point rise this year. That rose to 34% after the Congressional testimony.</p>
<p>A 25 basis point hike in June looks, right now, like a sure thing.</p>
<p>The coming months will be deeply revealing both in Australia and the US. While there seems to be quite a lot of clarity around the path of US interest rates, what the RBA will do remains much less clear, with some analysts predicting two, swift, 25 basis point rate rises, and some others still suggesting there could be further cuts.</p>
<p>The Australian dollar, house prices, and inflation will be the key figures to watch in that regard.</p><img src="https://counter.theconversation.com/content/73051/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>Uncertainty about energy prices and political dithering on company tax rates point to businesses waiting before investing heavily.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/727162017-02-09T19:12:30Z2017-02-09T19:12:30ZVital Signs: the case of the missing investment<figure><img src="https://images.theconversation.com/files/156149/original/image-20170209-28718-17l5x9s.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Reserve Bank, under Governor Philip Lowe, this week kept the cash rate at 1.5%.</span> <span class="attribution"><span class="source">AAP/Dean Lewins</span></span></figcaption></figure><p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
<p><em>This week: the RBA leaves the cash rate on hold, and why businesses are confident but not willing to invest.</em></p>
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<p>The biggest news of a slow-news week was the Reserve Bank of Australia (RBA) doing exactly what everyone thought it would do – <a href="http://www.abc.net.au/news/2017-02-07/reserve-bank-leaves-interest-rates-on-hold/8247134">leaving the cash rate at 1.50%</a>.</p>
<p>In a relatively upbeat assessment, the <a href="http://www.rba.gov.au/media-releases/2017/mr-17-02.html">RBA statement</a> noted things were getting better abroad:</p>
<blockquote>
<p>Conditions in the global economy have improved over recent months. Business and consumer confidence have both picked up. Above-trend growth is expected in a number of advanced economies, although uncertainties remain … The improvement in the global economy has contributed to higher commodity prices, which are providing a boost to Australia’s national income.</p>
</blockquote>
<p>So, too, were things getting better at home:</p>
<blockquote>
<p>The bank’s central scenario remains for economic growth to be around 3 per cent over the next couple of years. Growth will be boosted by further increases in resource exports and by the period of declining mining investment coming to an end. Consumption growth is expected to pick up from recent outcomes, but to remain moderate. Some further pick-up in non-mining business investment is also expected.</p>
</blockquote>
<p>It is that last sentence that it worth digging in to.</p>
<p>Here’s what’s been happening to private investment.</p>
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<p>Essentially, it’s been terrible since the 2008 financial crisis, despite large interest rate cuts. It is silly to conclude that interest rates are therefore a blunt instrument. The right counterfactual statement is what would have happened to the economy if rates hadn’t been cut.</p>
<p>But, nonetheless, it is a puzzle as to why businesses are reasonably confident but not willing to invest.</p>
<p>Here’s a theory. It’s not fancy. There’s no mathematics behind it. But here goes.</p>
<p>Here are two things that happened in the wake of the crisis:</p>
<ul>
<li><p>It became clear the risk-free rate of return is much lower than it was before. In the current age of secular stagnation there has been a clear and large decline in the real equilibrium rate of interest. This means the cost of capital for companies is lower.</p></li>
<li><p>Regulators decided that Australian companies must report their Weighted Average Cost of Capital (WACC), so it would be clearer when they held impaired assets that should be written down, or off.</p></li>
</ul>
<p>Sounds reasonable, right? Well, yes. </p>
<p>But an implication of this is that no firm in isolation wants to lower their WACC. A lower WACC for the same cash flows means the tangible part of the asset itself is more valuable, and for a fixed total value of the asset, that eats into goodwill (or other intangibles). All else equal, that would need to be written down with a lower WACC.</p>
<p>Now, if everyone started writing down goodwill it wouldn’t look so bad if I did. But if I’m the only one then I will get thumped by investors. </p>
<p>In the language of economics, we are stuck in a bad <a href="https://www.khanacademy.org/economics-finance-domain/microeconomics/nash-equilibrium-tutorial">Nash equilibrium</a>. The good equilibrium, where everyone acknowledges the lower WACC and lower goodwill, is out of reach because nobody wants to switch in isolation.</p>
<p>None of this would matter if companies used the actual (brave new world) cost of capital to assess future investment prospects. But try putting one WACC in your annual report and a different one in your spreadsheets and board documents and see how long it takes the Australian Securities and Investments Commission to prosecute.</p>
<p>So, it seems plausible that a seemingly sensible regulatory response to the crisis could lead businesses not to adjust to their new surroundings, and fail to make investments they should be making.</p>
<p>That is one way to rationalise the conundrum that businesses are confident but won’t invest.</p>
<p>Back to the RBA, its statement also noted:</p>
<blockquote>
<p>Financial institutions remain in a position to lend.</p>
</blockquote>
<p>Yes, but businesses aren’t borrowing. Perhaps that’s because they haven’t adjusted to the secularly stagnant world. And maybe that’s because regulators haven’t let them.</p><img src="https://counter.theconversation.com/content/72716/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>It is a puzzle as to why businesses are reasonably confident but not willing to invest.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/714132017-01-17T17:10:19Z2017-01-17T17:10:19ZWhy junk status still hangs over South Africa<figure><img src="https://images.theconversation.com/files/153041/original/image-20170117-2750-1oupxky.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Although South Africa <a href="http://mg.co.za/article/2016-12-02-reprieve-for-south-africa-as-sp-leaves-credit-rating-unchanged">avoided a downgrade</a> to non-investment grade, or junk status, in 2016, the country is not yet out of the woods and may be downgraded this year. The reasons for this are ongoing political risk as <a href="https://theconversation.com/ministers-call-for-zuma-to-resign-signals-internal-rebellion-in-south-africas-cabinet-69663">factional battles</a> in the governing African National Congress intensify, policy inconsistencies and low economic growth. </p>
<p>The effects of a sovereign credit rating downgrade would be significant for all South Africans. It would drive up borrowing costs, which in turn would have a negative impact on the government’s finances. It could also lead to foreigners leaving South Africa’s capital markets as well as driving the rand weaker. And it would in-turn push interest rates up, which would hurt ordinary South Africans.</p>
<p>But there are some possible steps the country can still take to avert a downgrade. These would include underscoring that Finance Minister Pravin Gordhan is secure in his job, and cutting wasteful expenditure.</p>
<h2>Impact on the markets</h2>
<p>South Africa’s public debt stands at 50.1% of the country’s GDP, <a href="http://www.tradingeconomics.com/south-africa/government-debt-to-gdp">nearly double what it was in 2006</a>. If the government’s borrowing position is not controlled it runs the risk of running up debts that it can’t service. An over-borrowed government is also perceived to be risky, which increases the cost of additional borrowing because lenders demand a premium. On top of this the country’s fiscus is under pressure from low revenue collection as a result of the slowing economy. </p>
<p>A downgrade to junk status is also likely to trigger significant capital flight. This is because sovereign downgrades typically have a direct impact on bonds and other fixed income securities making them less attractive to foreign bond investors. The likely outcome is that they will take their money to markets that offer better returns. This would be bad news for the country as <a href="https://www.wits.ac.za/news/latest-news/in-their-own-words/2016/2016-11/south-africa-needs-tougher-exchange-controls-before-junk-status-hits.html">foreign investors hold</a> about R62 billion (USD4.5 billion) in government securities. </p>
<p>A downgrade may not affect equity holders to the same extent as bondholders. Of the 472 companies listed on the Johannesburg Securities Exchange, <a href="http://www.fin24.com/Markets/Equities/dual-listed-shares-shine-on-the-jse-20160510">39 are dual listed</a>. These have primary or secondary listings in South Africa, London and New York. Companies listed abroad will be less vulnerable because most of their earnings are from abroad and in foreign currencies. But companies listed solely in South Africa would be affected by the country’s poor economic performance and a weaker currency. This is likely to drive them to internationalise which would mean a loss to South Africa. In addition, their valuations would be negatively affected by the higher cost of capital.</p>
<p>As the bond market reacts to the sovereign downgrade, the ripple effect would extend to the rand, causing it to weaken against other major currencies. The rand averaged R14/USD at the end of 2016 but a downgrade this year would be likely to push it beyond its lowpoint of about <a href="https://businesstech.co.za/news/finance/116372/rand-vs-the-dollar-1978-2016/">R16.80/USD</a>, possibly beyond the R20/USD level in the medium term). It plunged to this level in December 2015 after President Jacob Zuma announced he was removing then Finance Minister <a href="https://theconversation.com/the-removal-of-south-africas-finance-minister-is-bad-news-for-the-country-52170">Nhlanhla Nene</a>. </p>
<h2>Ordinary people</h2>
<p>According to the World Bank <a href="http://siteresources.worldbank.org/EXTAFRSUMAFTPS/Resources/chapter2.pdf">South Africans are the biggest borrowers in the world</a>. The country’s National Credit Regulator Statistics has reported that approximately <a href="http://www.ncr.org.za/documents/pages/Annual%20Reports/NCR%20Annual%20Report%202015-16.pdf">20% of consumers are three months in arrears</a>. </p>
<p>A Adowngrade would drive up debt servicing costs. In addition, the fiscus would be under pressure due to higher interest costs on debt repayments coupled with lower economic growth. The government’s response would then be to raise taxes. The choices would between the politically unpalatable option of raising the value added tax rate, which would hit the rural poor and the lower-middle class urban consumers, or increasing personal taxes on the already <a href="http://www.fin24.com/Economy/sa-is-an-overtaxed-nation-says-outa-20160403">over-taxed working middle class</a>. As the <a href="https://www.washingtonpost.com/news/monkey-cage/wp/2016/08/12/here-are-4-reasons-that-south-africas-african-national-congress-lost-ground-in-this-months-election/?utm_term=.70e8eaf46612">recent local government elections have shown</a> this could also have political ramifications for the governing party.</p>
<p>With budget deficits for the past 20 years <a href="http://www.tradingeconomics.com/south-africa/government-budget">averaging -3.24%</a>, a rating downgrade would force the government to either embark on injecting new money into the economy or <a href="http://www.capetalk.co.za/articles/1576/south-africa-s-government-is-running-out-of-money-sairr">borrowing</a> more. Injecting new money into the economy would fuel inflation and exert pressure on the exchange rate. The central bank would then have to respond by raising interest rates, again hitting consumers.</p>
<p>Further borrowing is also risky as it could lead to a possible debt trap where the government is no longer able to service its debts. </p>
<h2>Momentous year</h2>
<p>This is a momentous year for the country, with the <a href="https://theconversation.com/zuma-lives-to-fight-another-day-but-fallout-from-latest-revolt-will-live-on-69587">factional battles</a> and ANC contestation gathering momentum, and for the world with the inauguration of President Donald Trump and uncertainties around <a href="https://theconversation.com/brexit-shows-economic-costs-of-pursuing-populist-policies-like-trumps-62407">post-Brexit</a> trade policies. In such an uncertain environment, South Africa must rectify the four mistakes that have led it to drift to the point of a downgrade. </p>
<p>First, government policy needs to be clear, consistent and growth-oriented. Second, rather than considering further borrowing or increasing taxes, the government must cut non-productive spending and restructure the non-viable state-owned entities (especially those that rely on bailouts or have become too large to manage). Third, the authorities need to ensure that <a href="https://www.businesslive.co.za/bd/national/2017-01-06-sarss-luther-lubelo-should-not-have-attacked-rating-agencies-says-gordhan/">business confidence</a> doesn’t deteriorate further. It can do this by desisting from issuing <a href="https://www.dailymaverick.co.za/article/2016-12-22-we-want-the-rand-to-fall-so-that-when-it-rises-we-will-control-the-economy-maine/#.WHYPZVN97IU">conflicting political statements</a> which cause investors to panic. And lastly, the presidency must quell the uncertainty around the finance minister’s position. </p>
<p>If South Africa continues to get <a href="http://blackopinion.co.za/2016/12/05/south-africa-ruled-rating-agencies/">these wrong</a>, it’s likely that it will be downgraded this year. Since it takes <a href="http://www.cnbcafrica.com/news/southern-africa/2016/06/03/south-africa-to-regain-investment-rating/">an average of seven years for a country to regain its investment grade</a>, South Africa would be stuck in a <a href="https://theconversation.com/south-africa-can-expect-zero-growth-its-problems-are-largely-homemade-62943">middle-income trap</a> until at least 2024. Under this scenario it would be unable to move out of low-level manufacturing, unemployment levels would remain high and the economy would remain stagnant.</p><img src="https://counter.theconversation.com/content/71413/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sean Gossel receives funding from the University of Cape Town. </span></em></p><p class="fine-print"><em><span>Misheck Mutize does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The effects of a sovereign credit rating downgrade would be painful for all South Africans.Misheck Mutize, Lecturer of Finance and Doctor of Philosophy Candidate, specializing in Finance, University of Cape TownSean Gossel, Senior Lecturer, UCT Graduate School of Business, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/589232016-05-05T19:47:26Z2016-05-05T19:47:26ZVital Signs: the interest rate cut that could lead to less business investment<p>This week has been consumed with the <a href="https://theconversation.com/au/topics/federal-budget-2016">Federal Budget</a>, featuring Scott Morrison’s <a href="https://theconversation.com/scott-morrisons-growth-fantasy-needs-a-dose-of-venture-capital-discipline-57641">growth fantasy</a>, and some <a href="https://theconversation.com/budget-timing-tricks-do-nothing-to-help-small-business-or-the-economy-57644">timing tricks</a> masquerading as good economic policy.</p>
<p>And while the politics of economic policy in the budget have been dissected by the press, it is worth remembering that the real economy ticked along.</p>
<p>Or didn’t, really.</p>
<p>Dun & Bradstreet’s Business Expectations Index fell to 9.6 points for the third quarter of 2016, down from 12.7 points for the previous quarter 2016 and a whopping 17.6 points compared to the same period in 2015. Their “Actuals” index – which is backward looking, not forward looking–fell to 5.0 points, compared with 12.7 points last quarter.</p>
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<span class="caption">Dun & Bradstreet’s Business Expectations Survey Q3 2016.</span>
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<p>Stephen Koukoulas, Economic Adviser to Dun & Bradstreet, said:</p>
<blockquote>
<p>“Business optimism has clearly soured in the past few months to the point where sales, expected selling prices and employment have also slowed markedly. It is not clear what is driving this less optimistic tone…”</p>
</blockquote>
<p>I’ll tell you what is driving it – the CPI figures last quarter.</p>
<p>Recall that, depending on whether you look at core or headline figures, inflation was either very low, or negative last quarter.</p>
<p>Extrapolating from there, no wonder businesses think selling prices will be lower. And since sales are price times quantity, it’s not a big step to imagine a sales decline. And in the face of that, would you employ more people? Hint: no.</p>
<p>That pretty much encapsulates the kind of economic death spiral that Japan has been unable to extract itself from for two decades. And it is why policy makers are so fearful of the prospect of deflation.</p>
<p>Meanwhile, the RBA cut the cash rate from 2.0% to 1.75% <em>on budget day</em>. The bank pointed to deflationary pressure and the high Australian dollar as the key reason for the cut that, as of two weeks ago, bond markets gave only a 1 in 8 chance of occurring. Readers of Vital Signs, though, will recall that we have <a href="https://theconversation.com/vital-signs-all-eyes-on-the-aussie-dollar-57417">repeatedly pointed</a> to RBA governor Glenn Steven’s concern about the (high) exchange rate and his predilection to note that low inflation gives him wiggle room.</p>
<p>The prospect of deflation has given him not just wiggle room, but impetus, to cut.</p>
<p>The key question, of course, is how business will respond.</p>
<p>Standard theory tells us that when rates are cut that means the marginal cost of capital for business goes down and they invest more. The crucial embedded assumption there is that businesses’ beliefs about the marginal benefits of investment are the same.</p>
<p>But the rate cut tells businesses something about the benefits of investment. And if business decides that the news is new enough and bad enough, then a rate cut could actually lead to <em>less</em> investment.</p>
<p>And therein lies the conundrum for central bankers everywhere. Even if they don’t know what the new economic world looks like, business and consumers are gleaning clues from them.</p>
<p>Interest rate policy is no longer a kind of economic dentistry. It’s not even the expectations management game that Paul Volker and Alan Greenspan played so well.</p>
<p>It’s more like economic therapy. Businesses and consumers are lying back on Glenn Stevens’s (and Janet Yellen’s, and Mario Draghi’s) couch trying to understand the world around them. That’s a new game for central bankers.</p>
<p>It will be close to three months before we get our next read on inflation figures in Australia. In the mean time there will be a federal election, and plenty of actual economic data.</p>
<p>We are all still learning the rules of the “secularly stagnant” global economy, and with them, where we are headed.</p><img src="https://counter.theconversation.com/content/58923/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>We are all still learning the rules of the “secularly stagnant” global economy.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/560622016-03-10T23:41:26Z2016-03-10T23:41:26ZVital Signs: confidence ranges from ‘ok’ to ‘not great’; meanwhile, the Euro crisis simmers<p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data impacting global economies.</em></p>
<p><em>This week:</em></p>
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<p>Three important measures of confidence in the Australian economy were released this week. One was OK, one was not great, and one was either pretty bad or quite comforting, depending on your perspective.</p>
<p>First, for the “OK news”. The NAB business confidence index remained unchanged at 3, while the business conditions index rose 3 points to 8 - above the long-term average of 5. Business confidence is still affected by global financial volatility and the questionable <a href="https://theconversation.com/vital-signs-gold-star-for-glenn-stevens-as-australian-economy-proves-resilient-55624">China outlook I have written about in this column recently</a>. Conditions, by contrast, are looking reasonable: with continued low interest rates, subdued inflation and wage pressures, and a weaker Australian dollar helping exporters (all though the strong rally of recent days may put a dent in this next month).</p>
<p>The “not great news” came from the <a href="https://melbourneinstitute.com/downloads/media_release/2016/CSI/PressReleaseCSI20160309.pdf">Westpac/Melbourne Institute Index of Consumer Sentiment</a>. It fell from 101.3 to 99.1 - with pessimist outnumbering optimists for the first time in several months. The component measuring views of economic conditions for the next five years - a good measure of longer-term confidence and willingness to consume or invest - fell 2.5% to 92.6, down 0.9% on this time last year.</p>
<p>The third - and most interesting - piece of domestic news was the release of ABS housing data showing a marked cooling of demand for home loans. Total dwelling commitments fell 3.4% in seasonally adjusted terms, with the owner occupied segment down 4.3%. In one sense this sounds like a vote of no confidence - but remember that the Australian Prudential Regulatory Agency (APRA) tightened capital requirements for banks, with banks responding by raising rates. This kind of adjustment is just what APRA had in mind, given concerns about a housing bubble and weakening loan quality.</p>
<p>Around the world, China released its consumer price index figures for February on Thursday evening Sydney time. The CPI increased 2.3% (year on year) compared to market expectations of 1.8%. Yet this was largely driven by a 7.3% annual increase in food prices. Core CPI came in at just 1.3%, providing more support for further easing of monetary policy.</p>
<p>Chinese trade data reflects the weak global economy with exports down 20.6% in local currency terms over the year. In US dollar terms - which matters for China’s accumulation of foreign reserves - exports were down 25.4% and imports down 13.8%.</p>
<p>Finally, a very significant meeting of the European Central Bank (ECB) took place just a few hours ago. Markets expected ECB President Mario Draghi to announce further interest rate cuts and an expansion of the Euro 60 billion-a-month asset purchase program (quantitative easing, or QE) by 20 billion Euros a month. </p>
<p>The ECB reduced its main interest rates 0.05% to 0% and cut bank deposit rates by 10 basis point from 0.3% to -0.4% - that’s not a typo, interest rates are negative!</p>
<p>Good news for markets? The ECB also cut its inflation forecast, raising the ugly spectre of deflation anew. But what set markets into a tailspin was this statement by Draghi:</p>
<blockquote>
<p>“…can (rates) go as low as we want without having any consequences on the banking system? The answer is no.” </p>
</blockquote>
<p>The suggestion that more stimulus is needed, but might not happen, was met with concern by markets overnight. </p>
<p>In summary, lots of new data, but a very similar message to what we have seen recently. The Australian economy seems to be transitioning from the mining boom reasonably well, but there is a long way to go before it’s time to rest easy. That is in no small part due to the severe weaknesses in the global economy. Europe is using extraordinary measures in its struggle to fight deflation and China remains weak.</p>
<p>In future weeks watch out for an update on the US economy and whether the Fed raised rates too quickly late last year. We will also learn more about financial stability in China. Plenty to look forward to, and be nervous about.</p><img src="https://counter.theconversation.com/content/56062/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow</span></em></p>This week: a range of confidence measures, from not great to interesting for Australia; ECB confirms negative rates and further stimulus.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/545272016-02-11T19:01:55Z2016-02-11T19:01:55ZVital Signs: economy in a holding pattern<figure><img src="https://images.theconversation.com/files/111094/original/image-20160211-29175-snasna.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Confidence numbers reflect many are waiting to see if it's safe to invest.</span> <span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span></figcaption></figure><p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data impacting global economies.</em></p>
<p><em>This week: Waiting, watching, and holding our breath.</em></p>
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<p>This week saw the release of a slew of economic indicators ranging from sentiment measures such as the <a href="http://www.westpac.com.au/about-westpac/media/reports/australian-economic-reports/">Westpac-Melbourne Institute consumer confidence</a> index and the <a href="http://www.abc.net.au/news/2016-02-09/business-confidence-holds-up-despite-financial-volatility/7152176">NAB Business confidence</a> index, to <a href="http://www.abc.net.au/news/2016-02-10/commonwealth-bank-profit-rises-2-percent-to-4.62billion/7154528">CBA quarterly profits</a> and India’s GDP.</p>
<p>Business confidence was slightly down, while consumer confidence was markedly up – yet only back to the levels at the start of the year. Optimists barely outnumber pessimists and, tellingly, the housing index is 21% below where it was a year ago. Worse still, most of the boost is from lower petrol prices which, though good for households in the short-term, actually reflect global growth concerns at present.</p>
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<p>Job ads growth turned positive, but only just. The Australian labour market isn’t weak, but it isn’t super strong, either. Taken together with the NAB business confidence numbers it reflects businesses that are waiting and seeing before investing and expanding.</p>
<p>At the macro and international level, India’s fourth quarter GDP growth came in at an annualised rate of 7.3%, down from 7.7%. Worse, still, there were concerns about the voracity of the official numbers. And although India’s growth outpaced China’s 6.8% annual rate, those looking for a new engine for the global economy did not find much solace in the Indian numbers.</p>
<p>Janet Yellen certainly wasn’t summarising Australian data when she <a href="http://financialservices.house.gov/uploadedfiles/hhrg-114-ba00-wstate-jyellen-20160210.pdf">testified</a> before the Financial Services Committee of the United States Congress. But she might as well have been when she said “Financial conditions in the United States have recently become less supportive of growth”. That hearing also highlighted the fact that investors continue their flight to quality – making safe assets like US Treasuries and certain other sovereign bonds in such high demand that interest rates are sometimes negative. That same flight to quality is, in the US, making it increasingly expensive and difficult for lower-quality borrowers to obtain credit.</p>
<p>That exact phenomenon – a rise in the cost of credit for lower-quality borrowers – is a key thing to watch in Australia. If that happens here then we can expect the cost of mortgages to increase for certain borrowers who can least afford it. That is historically one way that housing bubbles burst. Not that I’m say we having a housing bubble in Sydney and Melbourne, but just suppose…</p>
<p>Oh, and if all this economic news wasn’t depressing enough, there’s currently nearly <a href="http://predictwise.com/politics/2016-president-winner">one chance in four</a> that either Donald Trump or Bernie Sanders will be elected President of the United States.</p>
<p>As with the US primaries so it is with the Australian and global economy. We will have to wait and see. Nervously.</p><img src="https://counter.theconversation.com/content/54527/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>The economic news of the week wasn’t that bad - but there’s still plenty of timid types around.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/430042015-06-10T20:01:36Z2015-06-10T20:01:36ZBusiness confidence got a post-budget boost … or did it?<p>National Australia Bank’s <a href="http://business.nab.com.au/nab-monthly-business-survey-may-2015-11384/">Business Confidence Index jumped</a> from 3 to 7 points this week, a nine-month high coming on the back of this year’s federal budget. The ANZ-Roy-Morgan <a href="http://www.roymorgan.com/morganpoll/consumer-confidence/consumer-confidence">Consumer Confidence Index also rose</a> after the budget.</p>
<p>This all sounds like good news but it also raises a number of questions. How good is the news? How long is the boost in confidence likely to last? And what might be different this year given more general economic conditions?</p>
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<p>The first thing to note is that these measures track changes in business and consumer expectations. So if everyone knew perfectly what was going to be in the budget then, all else equal, it should have no effect on business or consumer confidence indices.</p>
<p>The second thing to note is that there is a lot going on in the background. The Reserve Bank is often tinkering with interest rates, the economic conditions of trading partners are changing, bond market conditions may be moving around. All sorts of things are going on. And while it is a fool’s errand to try and analytically control for these things – after all, you can’t control for everything – it’s worth remembering that they are going on.</p>
<p>A very dangerous and foolish thing for a Treasurer to do would be to attribute positive changes in business or consumer confidence right after the budget to that budget. That would be a classic illustration of the <em>post hoc ergo propter hoc</em> fallacy (from the Latin, meaning “after this, therefore because of this”).</p>
<h2>Living in the moment</h2>
<p>Lastly, these indices ask people how confident they are now. Ideally that could be interpreted as their best forecast of future economic conditions for the infinite future. But, as has been well documented by social psychologists and behavioural economists, <a href="https://theconversation.com/an-economists-guide-to-business-and-consumer-confidence-37149">people don’t typically act like this</a>. Almost all of us – even those of us who know about it – suffer from some sort of “present bias”. We put more weight on today versus the future than we really should.</p>
<p><br></p>
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<p>Last year’s budget was widely considered to be a political disaster – one from which the government is still trying to recover – yet it’s correlation with business confidence was hard to see. The NAB Business Confidence index went from 7 to 7 after last year’s budget, and the in the following two months went to 8 and then 10. </p>
<p>All this against the backdrop of it seeming fairly likely that many budget measures designed to reduce the deficit were going to be blocked by the ALP and that the crossbench were hostile. It did drop significantly in September and then further, but it’s unclear that there was a big update about the likelihood of the measures passing by that stage.</p>
<p>Now, correlation isn’t causation, but it would seem hard to make the case that last year’s poorly received budget had a causal impact on business confidence. Interestingly, consumer confidence did fall, perhaps indicating a downward revision in household expectations about disposable incomes.</p>
<p>One conjecture is that budgets have much more of an impact on consumer confidence than they do on business confidence. Perhaps business confidence is driven much more by general economic conditions such as: interest rates, credit availability, and global economic conditions. </p>
<p>But for households, the budget often has a real impact on disposable incomes. Tax and benefit changes have a direct impact on consumers. Moreover, these are often quite a surprise (think pension indexation, the family tax benefit, and the 2% deficit levy from 2014). And as mentioned above, it is surprises in expectations, not the general level of expectations, that affect confidence indexes.</p>
<p>Looking at the historical data, the indices move around a fair amount in the coming months. Perhaps this reflects present bias among the respondents.</p>
<p><br></p>
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<p>In light of all of this I, myself, would not put a lot of stock in how business or consumer confidence changes after a federal budget is handed down. Maybe changes in consumer confidence give some idea of how households are going to change their expenditures, and that has an impact on the macro economy.</p>
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<p>But if I wanted a quick look at how the budget was received I’d look at revealed preference measures of behaviour. Are business investing in capital and hiring? Not according to the latest <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/5625.0">capital expenditure figures</a>. Are consumers spending on durable goods? </p>
<p>These are not perfect measures, but arguably they are better.</p><img src="https://counter.theconversation.com/content/43004/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>Business confidence might be up after the budget, but there are more reliable measures of what’s really driving the economy.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/411612015-05-11T20:08:25Z2015-05-11T20:08:25ZBudget explainer: the forces influencing Australia’s economy<p><em>By cutting through the buzz and spin surrounding the federal budget, The Conversation’s budget explainers arm you with the key terms and facts needed to understand the budget and what it means for you.</em></p>
<hr>
<blockquote>
<p>It’s going to be a great year for Australia, it’s going to be a positive year for the economy.
I am more positive about Australia than I have ever been. We are in a great position at the moment. On the economy, despite the domestic challenges, we are delivering the jobs, and importantly it is going to get better this year.
- Treasurer Joe Hockey, Jan 19, 2015 Neil Mitchell, 3AW</p>
</blockquote>
<p>Was Hockey right to be so confident? As we head into the federal budget tonight, all eyes will be on how the Coalition government might tackle some challenging economic data affecting Australia’s economy. Here’s a quick explainer of the major factors affecting revenues and the outlook.</p>
<h2>Falling commodity prices</h2>
<p>This should be a familiar story to most Australians by now. Over the last 10 years, Australia’s economy has ridden on the wave of a sharp rise in the terms of trade (the ratio of export to import prices). This was mainly driven by higher bulk commodity prices, including iron ore and coking coal, which are key inputs in the production of steel, driven by strong demand growth from China. This resulted in a massive investment boom to increase capacity, much of which recently has coming online.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/80237/original/image-20150504-2052-145utci.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/80237/original/image-20150504-2052-145utci.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/80237/original/image-20150504-2052-145utci.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=473&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80237/original/image-20150504-2052-145utci.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=473&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80237/original/image-20150504-2052-145utci.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=473&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80237/original/image-20150504-2052-145utci.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=594&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80237/original/image-20150504-2052-145utci.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=594&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80237/original/image-20150504-2052-145utci.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=594&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Figure.</span>
<span class="attribution"><span class="source">ABS, Gillitzer and Kearns (2005)</span></span>
</figcaption>
</figure>
<p>The <a href="http://www.industry.gov.au/industry/Office-of-the-Chief-Economist/Publications/Pages/Resources-and-energy-quarterly.aspx">Department of Industry and Science</a> has forecast growth in global iron ore trade (in tonnages) in 2015 will exceed 4%, with Australia accounting for around 5.5 percentage points. That Australian growth may outstrip global supply reflects an expectation that higher cost producers elsewhere will reduce production.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/80239/original/image-20150504-2077-1lu3mfd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/80239/original/image-20150504-2077-1lu3mfd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=473&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80239/original/image-20150504-2077-1lu3mfd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=473&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80239/original/image-20150504-2077-1lu3mfd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=473&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80239/original/image-20150504-2077-1lu3mfd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=595&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80239/original/image-20150504-2077-1lu3mfd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=595&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80239/original/image-20150504-2077-1lu3mfd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=595&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Figure.</span>
<span class="attribution"><span class="source">Department of Industry and Science (2015)</span></span>
</figcaption>
</figure>
<p>Consequently, supply growth, including from Australia, has been weighing on commodity prices. But it’s not all supply. China last year imported around two-thirds of globally traded iron ore, and growth in the Chinese economy has been slowing. Growth in fixed asset investment, which contributes to demand for crude steel, has declined, with the Chinese housing sector weak. Chinese crude steel production is down a year from ago, and while the Department of Industry and Science forecast that growth will return, it will be much more modest.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/80240/original/image-20150504-2063-1yih64l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/80240/original/image-20150504-2063-1yih64l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/80240/original/image-20150504-2063-1yih64l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=473&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80240/original/image-20150504-2063-1yih64l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=473&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80240/original/image-20150504-2063-1yih64l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=473&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80240/original/image-20150504-2063-1yih64l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=594&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80240/original/image-20150504-2063-1yih64l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=594&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80240/original/image-20150504-2063-1yih64l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=594&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Figure.</span>
<span class="attribution"><span class="source">WorldSteel Association (worldsteel), Department of Industry and Science (2015)</span></span>
</figcaption>
</figure>
<p>Note: Forecasts are from <a href="http://www.industry.gov.au/industry/Office-of-the-Chief-Economist/Publications/Pages/Resources-and-energy-quarterly.aspx">Department of Industry and Science (2015)</a>.</p>
<p>What this means is that the recent falls in the terms of trade reflect both supply and demand-side factors. They considerably impinge upon Federal Government revenues, most directly through company tax receipts. </p>
<p>Looking forward, in the next financial year LNG exports will grow substantially as expansions in capacity become productive, supporting overall output growth.</p>
<h2>Rising unemployment</h2>
<p>Outside of the resources sector, growth in the Australian economy appears to be soft. While overall output growth grew by a moderately below-trend 2.5% over the year to the December quarter, this partially reflected the strong growth in resource exports. Alternatively, domestic final demand growth, which excludes both net exports and inventories, was weak (1.2%). </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/80242/original/image-20150504-2091-1gbhsjm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/80242/original/image-20150504-2091-1gbhsjm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/80242/original/image-20150504-2091-1gbhsjm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=472&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80242/original/image-20150504-2091-1gbhsjm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=472&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80242/original/image-20150504-2091-1gbhsjm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=472&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80242/original/image-20150504-2091-1gbhsjm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=594&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80242/original/image-20150504-2091-1gbhsjm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=594&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80242/original/image-20150504-2091-1gbhsjm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=594&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Figure.</span>
<span class="attribution"><span class="source">ABS</span></span>
</figcaption>
</figure>
<p>This soft output growth outside of the resources sector, together with resources companies reducing jobs, has resulted in the unemployment rate gradually increasing to 6.2%. </p>
<p>This is higher than <a href="http://www.rba.gov.au/publications/bulletin/2014/sep/pdf/bu-0914-2.pdf">estimates</a> of the non-accelerating inflation rate of unemployment - the level of the unemployment rate consistent with unchanged inflation - although such estimates are inherently uncertain. Nonetheless, this signals that the economy is currently operating beneath its capacity. The under-utilisation rate – which also takes into account people working fewer hours than they desire – paints an even softer picture.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/80953/original/image-20150508-9077-1foijxu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/80953/original/image-20150508-9077-1foijxu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/80953/original/image-20150508-9077-1foijxu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=473&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80953/original/image-20150508-9077-1foijxu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=473&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80953/original/image-20150508-9077-1foijxu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=473&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80953/original/image-20150508-9077-1foijxu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=594&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80953/original/image-20150508-9077-1foijxu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=594&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80953/original/image-20150508-9077-1foijxu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=594&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Figure.</span>
<span class="attribution"><span class="source">ABS</span></span>
</figcaption>
</figure>
<p>So, considerable slack exists in the labour market. This is restraining growth in wages, and therefore inflation. </p>
<p>But low wages growth also acts to restrain disposable income and hence consumption growth. Consumer sentiment, as measured by the Westpac-Melbourne Institute survey, is presently is below average. In particular, respondents’ views about their families’ finances currently compared to a year ago and future economic conditions are weak.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/80248/original/image-20150504-2077-xmb42u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/80248/original/image-20150504-2077-xmb42u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/80248/original/image-20150504-2077-xmb42u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=535&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80248/original/image-20150504-2077-xmb42u.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=535&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80248/original/image-20150504-2077-xmb42u.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=535&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80248/original/image-20150504-2077-xmb42u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=673&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80248/original/image-20150504-2077-xmb42u.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=673&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80248/original/image-20150504-2077-xmb42u.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=673&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Figure.</span>
<span class="attribution"><span class="source">ABS</span></span>
</figcaption>
</figure>
<h2>Sectors outside the resources sector</h2>
<p>There is evidence that some sectors of the economy are moving out from the shadow of the resources sector. In particular, residential construction has been growing strongly, with rising dwelling approvals suggesting that this will continue.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/80625/original/image-20150506-22688-onfbx4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/80625/original/image-20150506-22688-onfbx4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/80625/original/image-20150506-22688-onfbx4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=473&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80625/original/image-20150506-22688-onfbx4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=473&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80625/original/image-20150506-22688-onfbx4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=473&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80625/original/image-20150506-22688-onfbx4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=594&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80625/original/image-20150506-22688-onfbx4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=594&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80625/original/image-20150506-22688-onfbx4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=594&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Australian Bureau of Statistics</span></span>
</figcaption>
</figure>
<p>But as residential investment is only a small share of the overall economy, its contribution to overall growth is insufficient to offset the falls in mining investment. </p>
<p>Growth in service exports has also improved, mainly reflecting tourism and education. Service exports are the second largest component of Australian exports, but are considerably smaller than resource exports. </p>
<p>A key factor influencing the demand of non-resource exports is Australia’s international competitiveness. Historically the real exchange rate (a measure of competitiveness) and the terms of trade have tended to move together over the medium term. Since the peak in the terms of trade the real exchange rate has fallen by nearly 13%. </p>
<p>A further improvement in competitiveness would promote Australia’s non-resource exports, helping to re-balance the sources of growth, and one way this could occur is through a depreciation in the nominal exchange rate.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/81075/original/image-20150509-22733-e5edpa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/81075/original/image-20150509-22733-e5edpa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/81075/original/image-20150509-22733-e5edpa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=474&fit=crop&dpr=1 600w, https://images.theconversation.com/files/81075/original/image-20150509-22733-e5edpa.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=474&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/81075/original/image-20150509-22733-e5edpa.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=474&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/81075/original/image-20150509-22733-e5edpa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=596&fit=crop&dpr=1 754w, https://images.theconversation.com/files/81075/original/image-20150509-22733-e5edpa.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=596&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/81075/original/image-20150509-22733-e5edpa.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=596&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Figure.</span>
<span class="attribution"><span class="source">Atkin, Caputo, Robinson and Wang (2014), RBA, ABS</span></span>
</figcaption>
</figure>
<h2>Investment and confidence</h2>
<p>Ultimately, what is necessary is an upswing in non-mining business investment. Here, there are mixed signals that businesses are ready to invest. Business credit growth, a timely indicator of the state of the business sector, has picked up, but remains subdued. The ABS Capital Expenditure survey (capex) asks businesses about their investment intentions and provides another important signal about the outlook. For the mining sector, the capex survey points to sizeable falls in nominal mining investment both this financial year and next. For the non-mining sector it is a less useful indicator, reflecting coverage issues, but it suggests little growth is likely.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/80251/original/image-20150504-2108-mj3i0i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/80251/original/image-20150504-2108-mj3i0i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/80251/original/image-20150504-2108-mj3i0i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=473&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80251/original/image-20150504-2108-mj3i0i.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=473&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80251/original/image-20150504-2108-mj3i0i.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=473&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80251/original/image-20150504-2108-mj3i0i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=594&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80251/original/image-20150504-2108-mj3i0i.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=594&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80251/original/image-20150504-2108-mj3i0i.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=594&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Figure.</span>
<span class="attribution"><span class="source">Melbourne Institute, ABS</span></span>
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</figure>
<p>Investment is volatile and modelling it is difficult, which makes it tough to pick when non-mining investment will improve. While the prevailing exceptionally low interest rates should be supportive - with the Reserve Bank of Australia recently cutting the cash rate to 2% - weak business sentiment has been <a href="http://www.rba.gov.au/speeches/2014/sp-ag-160914.html">attributed</a> as one restraining factor. Business conditions, according to the NAB Monthly Business Survey, have improved relative to this time last year, although a further strengthening is necessary for a sustained upswing in non-mining investment.</p>
<p>Overall, the Australian economy is in a situation where falling commodity prices are weighing on income growth and domestic final demand growth is soft and is likely to remain so in the near term, limiting the scope for any improvement in unemployment. This is a difficult environment in which to narrow the deficit.</p>
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<p><em>Read other federal budget explainers <a href="https://theconversation.com/au/topics/budget-explainer">here</a>.</em></p><img src="https://counter.theconversation.com/content/41161/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tim Robinson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>As we head into the federal budget tonight, all eyes will be on how the Coalition government might tackle some challenging economic data affecting Australia’s economy.Tim Robinson, Research Fellow, Melbourne Institute, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/414262015-05-11T00:43:12Z2015-05-11T00:43:12ZTo fix confidence this budget will need to contain stimulus<p>The decision of the Reserve Bank of Australia (RBA) to lower the cash rate to <a href="http://www.rba.gov.au/media-releases/2015/mr-15-08.html">2%</a> this month is good economics. </p>
<p>The output gap (i.e. the difference between actual GDP and its trend level) is negative and widening, and inflationary pressures are very subdued, so the interest rate can be reduced to stimulate production and employment.</p>
<p>With its decision, the RBA has sent two signals. First: the ongoing economic contraction is serious and needs to be taken care of. Second: monetary policy is ready to play its part to support the recovery.</p>
<p>To whom are these signals addressed? Certainly to consumers and the business community, whose falling confidence will be somewhat restored by knowing the RBA is not going to repeat the mistakes of its European counterpart. </p>
<p>But primarily, these are signals that the federal government ought to pick up, and act upon, otherwise Australia will experience the recession we managed to avoid in 2008-09. </p>
<p>This means that, consistent with the RBA’s expansionary monetary policy, the federal budget should include expansionary fiscal measures to support aggregate demand. </p>
<p>If instead restrictionary measures aimed at reducing debt become predominant, then Australia’s economic barometer will take a turn for the worse. </p>
<h2>The cruellest month</h2>
<p>April was a month of bad economic news for Australia. </p>
<p>On April 15, the World Economic Outlook (WEO) of the International Monetary Fund presented projections for the Australian economy that were significantly worse than those reported only six months before.</p>
<p>Most notably, the October 2014 issues of the WEO estimated the output gap in 2014 would be only -0.095% of trend GDP. But in the April 2015 issue, the output gap has been revised to -1.4%, with projections that it will remain negative in 2015-16. </p>
<p>This indicates the contraction is deeper than expected. The slow growth of gross domestic income throughout 2014 confirms the underlying weakness of the <a href="http://theconversation.com/why-the-federal-budget-is-a-textbook-policy-dilemma-40823">Australian economy</a>.</p>
<p>On April 23, the <a href="http://business.nab.com.au/quarterly-business-survey-march-2015-10539/">NAB Quarterly Business Survey</a> saw a drop back in business confidence in the first quarter of 2015, coupled with softer business conditions and moderately worsening expectations for future activity.</p>
<p>Some more comforting news came from the <a href="http://www.roymorgan.com/morganpoll/consumer-confidence/consumer-weekly-rating">ANZ/Roy Morgan Poll</a>, which showed stable, if not moderately increasing, consumer confidence throughout April. </p>
<p>But unfortunately, this trend was short-lived and as of the first week of May, consumer confidence had fallen to the lows it experienced at the beginning of the year.</p>
<p>To complete this rather gloomy picture, seasonally adjusted labour data released by the <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6202.0">Australian Bureau of Statistics</a> saw the number of employed persons in the country decline by almost 3% in April. The number of unemployed persons increased by 7%, and the unemployment rate grew from 6.1% to 6.2%. </p>
<p>All this bad news is obviously linked. Worsening economic projections hurt confidence and lower confidence results in slower economic activity. </p>
<p>Breaking this potentially vicious circle will require an adequate mix of macroeconomic policies.</p>
<h2>Look on the demand side</h2>
<p>By cutting the interest rate twice in the first four months of the year, the RBA has made it clear the recovery is a matter of sustaining aggregate demand through expansionary policies. </p>
<p>But we cannot expect monetary policy alone to bring the Australian economy back into good shape. When the interest rate is already low, further interest rate cuts are likely to produce only moderate expansionary effects.</p>
<p>Fiscal policy therefore needs to play a prominent role, which in today’s circumstances means the government ought to provide some fiscal stimulus via the budget. In simple terms, the stimulus should consist of more public expenditure and lower taxes. </p>
<p>The data show that one dollar spent by the federal government increases Australian GDP by <a href="http://theconversation.com/why-the-federal-budget-is-a-textbook-policy-dilemma-40823">1.2 dollars</a>. Therefore, by increasing expenditure the government can effectively help the recovery.</p>
<p>Conversely, if the government was to reduce expenditure and/or increase taxes, then it would nullify the action of the RBA and cause further uncertainty and loss of confidence.</p>
<p>Moreover, despite what some might believe, a fiscal stimulus today does not mean compromising the future debt position of Australia. </p>
<p>For one thing, the debt to GDP ratio in Australia is still low by international standards. And the fiscal stimulus should only be temporary, reversed as soon as the economy turns around. </p>
<p>This cyclical patter of fiscal policy will guarantee that deficit is not systematically accumulated over the medium to long term and as a result, that the debt level remains sustainable.</p>
<p>The economic policy debate in recent years has essentially focused on the debt issue, with some very strong rhetoric suggesting Australia has a debt problem. Consequently, deficit reduction and debt stabilisation have become the primary concerns of fiscal policy.</p>
<p>But what is costing the Australian economy jobs today is the economic contraction, not debt. Households’ welfare and business profits are under threat because of the contraction, not because of debt. Similarly, the economic prospects of the youth are worsening because of the contraction, not because of debt.</p>
<p>The real problem for Australia is to get out of the contraction, not to lower debt. It is now up to the government to formulate a budget that rises to this challenge.</p><img src="https://counter.theconversation.com/content/41426/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Fabrizio Carmignani receives funding from the Australian Research Council for a project on the estimation of the piecewise linear continuous model and its applications in macroeconomics.</span></em></p>It will take more than monetary policy to get Australia’s business and consumer confidence back on track.Fabrizio Carmignani, Professor, Griffith Business School , Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/404702015-05-06T19:49:58Z2015-05-06T19:49:58ZBudget explainer: What do key economic indicators tell us about the state of the economy?<figure><img src="https://images.theconversation.com/files/79872/original/image-20150430-6230-1ghlbmv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The key indicators of the health of the economy are the unemployment rate, inflation rate and economic growth.</span> <span class="attribution"><span class="source">AAP Image/Julian Smith</span></span></figcaption></figure><p><em>By cutting through the buzz and spin surrounding the federal budget, The Conversation’s budget explainers arm you with the key terms and facts needed to understand the budget and what it means for you.</em></p>
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<p>Certain policy objectives in macroeconomic policy are almost universally accepted by economists:</p>
<p>1. A stable and strong rate of economic growth;</p>
<p>2. Low unemployment; and</p>
<p>3. Stable and low inflation.</p>
<h2>Perhaps less universally accepted are:</h2>
<p>4. A manageable current account deficit in the balance of payments; and</p>
<p>5. Structural fiscal budget balance and a low (or zero) level of debt.</p>
<p>Number four of these objectives receives little attention in Australia these days. However, the fifth of these objectives appears to have taken over economic and political debate in Australia.</p>
<p>Certain key indicators are used to judge the health of the economy and to evaluate government or Reserve Bank policies in terms of their ability to reach these objectives.</p>
<h2>A stable and strong rate of economic growth</h2>
<p>Economic growth refers to the expansion of society’s productive potential. It is usually measured by the annual percentage change in real gross domestic product (GDP). </p>
<p>Real GDP is a measure of the value of production of all goods and services produced in Australia, after the effects of inflation have been removed. </p>
<p>Therefore, if economic growth is 3% this year, then 3% more goods and services were produced this year than in the previous year. </p>
<p>Real GDP and economic growth are not perfect measures of what’s happening to a society’s wellbeing. Nevertheless, more jobs, increased standards of living and providing for the most disadvantaged depend on having a strong rate of growth.</p>
<h2>Low unemployment</h2>
<p>Unemployment is the greatest contributing factor to poverty. High unemployment also represents a waste of economic resources as less is produced (lower GDP) if workers are not being fully utilised. </p>
<p>There are other costs associated with high unemployment including a loss of individual self esteem, loss of skills, retraining costs and social problems. Governments also face consequences such as having to reallocate scarce taxation revenue from productive projects to social security payments, as well as the electoral unpopularity often associated with high unemployment. </p>
<p>The widely quoted indicator of unemployment is the <a href="http://www.abs.gov.au/ausstats/abs@.nsf/products/FBE517ECA9B07F63CA257D0E001AC7D4?OpenDocument">unemployment rate</a> derived from the Australian Bureau of Statistics (ABS) Labour Force Survey. </p>
<p>The unemployment rate is the percentage of the labour force that is unemployed. The labour force is the sum of the employed and the unemployed. You only have to work for one hour in paid employment per week to be classified as employed! To be classified as unemployed you have to be ready to start work and have actively looked for work in the past four weeks before the survey. </p>
<p>About <a href="http://theconversation.com/unemployed-or-lazy-economists-know-better-30515">1.5 million people</a> of working age rely almost entirely on social security for a living but only a third are unemployed.</p>
<p>While an important aim is to reduce the unemployment rate, being too successful or reducing it too quickly can itself be a problem as this can be interpreted as evidence of a potential increase in inflation. In economics jargon, unemployment must not fall too near the “<a href="http://theconversation.com/not-just-a-number-defining-full-employment-15248">natural rate of unemployment</a>”.</p>
<h2>Stable and low inflation</h2>
<p>The inflation rate is the percentage increase in the general price level in the economy from one year to the next. </p>
<p>The most common measure of the general price level is the consumer price index (CPI). Although its measurement and interpretation is subject to many caveats it is still generally recognised as a good indicator of the cost of living of the average household. </p>
<p>If the index rises from, say, 120 to 122 then the inflation rate is 100*(122-120)/120 = 1.7%. </p>
<p>Wages and social security payments would need to rise by 1.7% in order for standards of living not to fall.</p>
<h2>A structural fiscal budget balance and a low (or zero) level of debt</h2>
<p>If the federal government’s expenditures are greater than its revenue a budget deficit results. Budget deficits add to government debt. </p>
<p>It is generally accepted the actual government budget will (and should) fluctuate between deficit and surplus during, respectively, downswings and upswings in the economy. </p>
<p>Unlike the actual budget balance, the structural balance is basically the budget deficit or surplus after accounting for cyclical movements in the economy – the balance when conditions are normal or average. </p>
<p>Considerable <a href="http://theconversation.com/australias-economy-is-healthy-so-how-can-there-be-a-budget-crisis-26036">political debate and media coverage</a> of deficit and debt issues concerns have centred on the fear that Australia, on its current trajectory, is heading for (or well on the way to) an unsustainable structural deficit.</p>
<h2>Other indicators</h2>
<p>The above areas may be traditional indicators of the health of the economy, yet they say little about the underlying processes which give rise to them. </p>
<p>For instance, economic growth can only increase and unemployment can only be reduced by firms increasing output and jobs and investing in new projects. This is why business confidence is so important. </p>
<p>The National Australia Bank (NAB) publishes a quarterly <a href="http://business.nab.com.au/tag/business-survey/">index</a> of business confidence based on a survey of Australian firms. These firms are asked to rate their expectations of a number of factors, such as employment and business profits. Indexes are calculated by taking the difference between the percentage of respondents nominating good or very good, or a rise and those nominating poor or very poor, or a fall. The business confidence index is an average of these individual indexes.</p>
<p>Businesses are unlikely to expand if they don’t think consumers are going to spend and this is where consumer confidence is important. </p>
<p>The <a href="https://melbourneinstitute.com/miaesr/publications/indicators/csi.html">Westpac-Melbourne Institute Consumer Sentiment index</a> is based on surveys of households regarding their expectation of key economic variables affecting them, such as the family finances. On the basis of whether their conditions are expected to improve or get worse households are classified as optimists or pessimists. If optimists outnumber pessimists then the index exceeds 100 and obviously the higher the index, the higher, on average, is consumer confidence.</p>
<p>Despite a myriad of indicators and attempts to introduce many other measures of wellbeing into the policy debate, such as the <a href="http://lateraleconomics.com.au/wp-content/uploads/2014/02/Fairfax-Lateral-Economics-Index-of-Australias-Wellbeing-Final-Report.pdf">Fairfax-Lateral Economics Index of Australia’s Wellbeing</a>, the unemployment rate, inflation rate and the rate of economic growth will continue to be the key indicators of the health of the economy.</p><img src="https://counter.theconversation.com/content/40470/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Phil Lewis does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article. He also has no relevant affiliations. During his career he has received funding from many private and public sector organisations including most recently the ARC, NCVER, DEEWR and the AFPC</span></em></p>The key economic indicators to look out for on budget night.Phil Lewis, Professor of Economics, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/371662015-03-12T02:34:35Z2015-03-12T02:34:35ZIt’s the ‘vibe’ of the thing: the critical art of measuring business and consumer confidence<figure><img src="https://images.theconversation.com/files/74434/original/image-20150311-20556-y7huix.jpg?ixlib=rb-1.1.0&rect=1%2C94%2C997%2C793&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">People's beliefs, emotions, and state of mind influence economic performance and prosperity.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>The Westpac Melbourne Institute Index of Consumer Sentiment <a href="https://melbourneinstitute.com/downloads/media_release/2015/CSI/PressReleaseCSI20150311.pdf">reveals consumer confidence dropped by 1.2% in March</a>, following an 8% rise in the index the previous month - which, in turn, followed a substantial fall in December. The <a href="http://www.roymorgan.com/findings/6110-anz-roy-morgan-consumer-confidence-march-10-2015-201503100417">ANZ-Roy Morgan Consumer Confidence Index</a>], released yesterday, told a similar story: confidence is about one percent lower than last month.</p>
<p>The Australian Chamber of Commerce and Industry’s most recent quarterly report on <a href="http://www.acci.asn.au/getattachment/5e2806f4-4da0-4c92-89f5-040f0bfffd79/ACCI-Survey-of-Investor-Confidence---December-Quar.aspx">investor confidence</a>, released last December, indicated that businesses at that time were pessimistic about the state of the economy. More recent data suggests that business-people remain concerned: the latest <a href="http://business.nab.com.au/monthly-business-survey-february-2015-10020/">National Australia Bank’s Monthly Business Survey</a> showed business confidence at its lowest level since mid-2013, while the <a href="http://www.roymorgan.com/findings/6109-business-confidence-weaker-in-feb-201503092220">Roy Morgan Business Confidence Index</a> likewise fell substantially.</p>
<p>If the world of business, economics, and finance were governed purely by logic and dispassionate quantitative analysis, there would be little interest in variables such as consumer sentiment and investor confidence. But people do not always behave dispassionately and logically. Their emotions and their beliefs - founded or unfounded - affect the decisions that they make; these decisions in turn influence economic performance and prosperity. Because of this, economists and policymakers pay considerable attention to measures of consumer and investor confidence.</p>
<h2>Measuring people’s state of mind</h2>
<p>Confidence measures are different from most economic data because they place a number on an amorphous psychological variable. They seek to quantify not the value of observable economic transactions, but people’s states of mind. It is conceivable that such measurements could be nothing but “noise” - random opinions that are unrelated to behaviour or to the actual state of the economy - in which case they would be irrelevant for our economic understanding. But this turns out not to be true: confidence measures do help explain actual economic behaviour. </p>
<p>When consumers feel confident about the state of the economy, they believe (on average) that they have secure job prospects, that they are more likely to see wage increases, and that their wealth (in the form of, say, share market holdings) is likely to go up. Such factors tip consumers towards spending rather than saving. Likewise, if businesses feel confident about the prospects for sales, they are more likely to undertake new capital expenditures and hire workers.</p>
<p>An economy where consumers are buying and businesses are investing is an economy that is likely to be booming, because it is the level of spending that drives the level of activity in the economy in the short run. An economy where confidence is low, conversely, is one when consumers and businesspeople are likely to be cautious, resulting in lower spending and depressed economic activity.</p>
<p>Of course, changes in confidence don’t occur in a vacuum. They respond to the news that people read and watch, to the conversations that they have with their friends, and to their own personal experiences of how the economy is performing. </p>
<p>Researchers have tried to identify the extent to which changes in confidence can be explained by the arrival of economic news (unemployment reports, stock market changes, and so on). If confidence measures just summarise other news that is already available, then they are less interesting. But if confidence measures tell us something about the economy above and beyond what we might learn from other sources, then they are of much greater significance. Among other things, confidence measures then become more likely to help us forecast the future direction of the economy. </p>
<h2>The wisdom of many - or animal spirits?</h2>
<p>In a sense, these measures are an attempt to tap into the wisdom of crowds. Because individuals live in the economy, they have direct and immediate information on how their little piece of the economy is performing - information that may not be immediately (or ever) available to government statisticians. If consumers and managers have good reasons for their confidence in the economy - or their lack of it - then measures of sentiment should contain information about where the economy is heading. </p>
<p>And indeed, research on confidence measures suggests that they do reflect market participants’ knowledge of what is likely to happen in the future, in addition to available information on the current state of the economy. Confidence measures are therefore helpful for predicting future economic performance.</p>
<p>But there may be even more going on. Perhaps these measures reflect more than current news and people’s tacit understanding of the future. A long tradition in economics asks whether economic behaviour is driven not just by calculation and rational decision, but also by unpredictable whim. John Maynard Keynes, in particular, thought such “animal spirits” were a key source of economic instability: </p>
<blockquote>
<p>“… there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism … if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die.” (J.M. Keynes, The General Theory of Employment, Interest and Money, New York: Harcourt, Brace & World, 1936, p. 162)</p>
</blockquote>
<p>Consumer and investor confidence measures, in this view, also reflect waves of optimism or pessimism that do not have a obvious rational basis, and that cannot be understood either in terms of current news or available information about future economic performance. </p>
<p>We do not really know for sure how important such effects may be. In part this is because, intriguingly, beliefs can have an element of self-fulfilling prophecy. If consumers and businesspeople are pessimistic about the state the economy, then consumption and investment spending fall, and economic performance suffers, validating the pessimistic expectations. Conversely, optimism about the state of the economy can lead to higher spending that results in higher economic growth, justifying the initial optimism. In such a world, there may be no obvious basis for a change in consumer or investor sentiment, and yet that change in beliefs can turn out to be rational after the fact.</p>
<h2>Bad news bears</h2>
<p>So what does all this mean for the Australian economy? Confidence certainly matters in Australia, just as it does in other economies. <a href="http://www.sciencedirect.com/science/article/pii/S0167487013001165">Research conducted at the Melbourne Institute by Viet Nguyen and Edda Claus</a> suggests that bad news, in particular, influences confidence and consumption in Australia. </p>
<p>This finding was echoed by Warren Hogan, Chief Economist at ANZ in his comments on the recent ANZ-Roy Morgan confidence measures. Consumers, Morgan notes, “continue to show an asymmetric response to newsflow. Over the last year or so, there have been sizable declines in consumer confidence in relation to any negative news around the Federal budget and economy”. Recent confidence numbers are not so low as to be alarming, but it is fair to say that the measures are starting to show a pattern of warning signals for the Australian economy. </p>
<p>Given that confidence is affected by economic news, it is also affected by economic policies. When the Reserve Bank of Australia cut interest rates last month, its primary aim was to encourage interest-sensitive components of spending, such as firm’s capital expenditures and households’ purchases of durable goods. But the RBA undoubtedly hoped that this decision would help to spur confidence in the economy as well.</p>
<p>A case can be made that this was one reason that Australia made it through the global financial crisis relatively unscathed: aggressive action on both monetary and fiscal policy may have helped restore the confidence levels of Australian consumers and investors. Even though confidence levels fell substantially in 2008, they had recovered to pre-crisis levels by mid-2009. (Compare this with the United States, which did not get back to the level of confidence of January 2008 until the middle of 2012.)</p>
<p>Yet this can be a double-edged sword. When Australians observe the Reserve Bank moving to cut interest rates and <a href="http://www.rba.gov.au/media-releases/2015/mr-15-03.html">stating that</a> “further easing of policy may be appropriate over the period ahead”, they might react in different ways. Do these actions and words make them more nervous (“the RBA must think there is a problem with the economy, or else they wouldn’t be cutting rates”) or more confident (“the RBA is clearly on top of things, and the interest rate cut will lead to faster growth”)? </p>
<p>Economics is not just a matter of rational financial calculation; psychological variables matter as well. Consumer and investor confidence are therefore more than simply variables that policymakers must factor into their decisions. They are themselves targets of economic policy.</p><img src="https://counter.theconversation.com/content/37166/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew John does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The fact is, people do not always behave dispassionately and logically. Which is why measuring consumer sentiment matters.Andrew John, Associate Professor of Economics, Melbourne Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/371492015-03-11T19:26:27Z2015-03-11T19:26:27ZAn economist’s guide to business and consumer confidence<p>Consumer and business confidence indicators frequently make news headlines and are used in speeches by analysts prognosticating on the health of the economy. But what are these indicators ultimately based on, why do they attract such interest and what can our government realistically do to shore them up? </p>
<h2>Confident of what, exactly?</h2>
<p>When a business person is asked about her level of confidence in the economy (sometimes also termed “sentiment”), the questions posed are of such a generic nature she will most likely answer them on the level of gut feel. She will not perform arithmetic calculations to arrive at an exact value of sales over the last quarter – though she may make a passing judgement on the thickness of her order book, or recall phone conversations with clients over the past few weeks. </p>
<p>She will not sum up and formally compare the capacity of new suppliers coming into the market with the capacity of suppliers going out of business – though she may make a rough estimate of whether there seems to have been a recent expansion or contraction of her suppliers’ overall capacity. What she offers in response to a question about confidence is a ballpark overall expectation based on innumerable mini-observations of the level of activity of those whose behaviour he relies upon for his livelihood.</p>
<p>Similarly, a consumer’s confidence is built from 101 observations that he makes every day – from how much money is coming into his bank account, to whether his job seems secure, to whether the man next door is likely to get that promotion he has been hoping for.</p>
<h2>Why the fuss?</h2>
<p>One might think that the unincentivised guesses of a random collection of business people and consumers would be a poor input for economic policy. Yet the first reason forecasters look so keenly at confidence levels is that those being surveyed have no reason to lie systematically. The second reason is that confidence surveys tap into a source of information that is both critical to the workings of the economy, and untapped by any other aggregate economic indicator.</p>
<p>It may well be that some individuals respond with only noise to a confidence question: that is, their answers are not informed by any economic signals they have received. However, this noise will not be on average positive or negative as long as responders are neither materially nor psychologically rewarded for over- or under-estimates. When aggregated across a large number of survey respondents, the randomness of this noise means the noisy optimists should cancel out the noisy pessimists, taking them both out of the equation and leaving us with a roughly accurate measure of overall sentiment.</p>
<p>Second and more subtly, the type of information being captured in confidence questions is that same micro-level information we rely upon implicitly to keep the economy’s wheels turning smoothly every day. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/74436/original/image-20150311-20517-1mqwjpx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/74436/original/image-20150311-20517-1mqwjpx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/74436/original/image-20150311-20517-1mqwjpx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/74436/original/image-20150311-20517-1mqwjpx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/74436/original/image-20150311-20517-1mqwjpx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/74436/original/image-20150311-20517-1mqwjpx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/74436/original/image-20150311-20517-1mqwjpx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="attribution"><span class="source">Jacob Bøtter/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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</figure>
<p>One of the crowning achievements of capitalism is that micro-signals hard to observe at any higher level of aggregation are directly drawn upon in the small production and consumption decisions taken every day in our economy. </p>
<p>People make economic choices based on their likelihood of working out well, which is (correctly) perceived to be a function of surrounding market conditions, which we judge through our interpretation of micro-signals. This constant exploiting of micro-signals through individual micro-actions is astoundingly efficient, and a key reason for capitalism’s superiority as an economic system to communism: in the latter, these micro-signals are unobserved and as a result not acted upon by the central authority that determines production levels. </p>
<p>A capitalist system by contrast relies upon each individual doing what is best for him personally, which in turn means he rationally acts on those same innumerable micro-signals of activity, preference, and opportunity that inform his answers to confidence survey questions. Asking someone to answer those questions therefore constitutes an attempt to harness the lifeblood of economic decision making.</p>
<h2>Priming the pump</h2>
<p>Armed with this understanding, what can a government do to respond to ailing measures of consumer or business confidence?</p>
<p>Because confidence on both sides of the market is built on signals of present potential and future opportunity, the most direct way for a government to shore up confidence is to increase the number or strength of signals that make opportunities appear plentiful and promising. One very direct way to do this is through infusing everyone’s bank accounts with cash. This type of Keynesian stimulus works because it makes everyone feel freer to pursue new opportunities and try out new products: everyone’s opportunity set has expanded.</p>
<p>Another, less trumpeted way for a well-meaning government to intervene when confidence is low is to act as an economic “matchmaker”. Pessimistic expectations are not the result of having tried out every possible trading partner in every existing market and having been turned down every time, but rather the result of some searching and experimentation that is limited by transaction costs. </p>
<p>If the government can help a supplier reduce transaction costs by encouraging market clearing mechanisms or fostering business forums and exhibitions, networking forums, and job fairs, then it can lift the spirits of the most hardened traders. </p>
<p>When it comes to predicting where the economy is headed, gut-feel confidence matters. The good news for governments is that because it’s based on signals that can be somewhat manipulated, confidence itself is more manipulable than one might think.</p><img src="https://counter.theconversation.com/content/37149/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gigi Foster receives funding from the Australian Research Council.</span></em></p>It would seem odd that the guesses of a random collection of people inform economic policy. But there’s more to consumer sentiment than that.Gigi Foster, Professor, School of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/300822014-08-04T05:05:44Z2014-08-04T05:05:44ZEnd of low rates in sight as case for interest rate hike strengthens<p><em>The CAMA RBA Shadow Board is a project by the Centre for Applied Macroeconomic Analysis, based at the ANU, which asks industry and academic economists what interest rate the Reserve Bank of Australia should set.</em></p>
<hr>
<p>New inflation and growth data suggest that the RBA’s low interest rate setting ought to come to an end soon. Inflation is close to the upper target band, consumer confidence has bounced back from the temporary drop in May and GDP growth remains solid. Though some weakness in the labour market remains, the majority of Shadow Board members is arguing for an interest rate increase in the foreseeable future. </p>
<p>That said, the CAMA RBA Shadow Board’s conviction that the cash rate ought to remain at 2.5% in August remains strong; it attaches a 71% probability that this is the appropriate setting. The confidence attached to a required rate cut has fallen one percentage point to 5%, while the confidence in a required rate hike has risen to 24%.</p>
<p>Headline inflation in Australia rose to 3% (year-on-year) in the second quarter of 2014, hitting the top of the RBA’s inflation target band of 2-3%. Core inflation in the same period has also edged up to 2.81%, suggesting that the increase in prices is broad-based. With domestic growth looking solid and other economic indicators (e.g. consumer confidence, business confidence, inventory stocks, private sector credit) pointing to a continuation of the economic expansion, the case for an increase in the benchmark policy rate is increasing. </p>
<p>Furthermore, among the Board members, concern about inflated asset prices, resulting from low interest rates, is rising. The biggest factor holding interest rates in check appears to be the unemployment rate which currently stands at 6% and is unlikely to improve significantly.</p>
<p>The Australian dollar remains relatively strong, hovering around 93 US cents. Some uncertainty remains about the federal government’s budget, with the Senate unlikely to pass significant sections of the budget announced in May.</p>
<p>The global economy appears to be improving. US second quarter GDP roared back to 4% (annualized), after an unusually weak first quarter. This is supported by a further reduction in the US unemployment rate. The Federal Reserve is continuing with its phase-out of quantitative easing, and financial markets are beginning to price in an interest rate rise in the medium term. China’s economy is steadying; the European economies are still languishing, but not worsening. </p>
<p>Some global risks remain, in particular geopolitical conflicts (such as Syria, <a href="https://theconversation.com/explainer-how-will-sanctions-against-russia-work-29920">Ukraine</a>, and the <a href="https://theconversation.com/here-we-go-again-israel-and-hamas-resume-their-war-29379">Israeli/Gaza conflict</a>) but also economic and financial problems including the economic slowdown of BRICS countries and <a href="https://theconversation.com/for-argentina-debt-default-is-a-solution-not-a-problem-30010">Argentina’s second debt default</a>.</p>
<hr>
<h2>What the CAMA Shadow Board believes</h2>
<p>The consensus to keep the cash rate at its current level of 2.5% has fallen 5 percentage points to 71%. The probability attached to a required rate cut is up a percentage point to 5% while the probability of a required rate hike has risen to 24% (20% in July).</p>
<p>Six months out, the probability that the cash rate should remain at 2.5% is unchanged at 47%. The estimated need for an interest rate increase equals 45% (41% in July), while the need for a decrease equals 8%. A year out, the Shadow Board members’ confidence in a required cash rate increase has risen further to 65% (61% in July), the need for a decrease fell to 9% (11% in July), while the probability for a rate hold slipped two percentage points to 26% (28% in July).</p>
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<a href="https://images.theconversation.com/files/55600/original/6jwd5chj-1407118173.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55600/original/6jwd5chj-1407118173.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/55600/original/6jwd5chj-1407118173.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55600/original/6jwd5chj-1407118173.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55600/original/6jwd5chj-1407118173.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55600/original/6jwd5chj-1407118173.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55600/original/6jwd5chj-1407118173.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55600/original/6jwd5chj-1407118173.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=454&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Aggregate August.</span>
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<hr>
<h2>Comments from Shadow Reserve bank members</h2>
<p><strong>“Prevent a housing bubble from inflating.”</strong></p>
<p>Paul Bloxham, Chief Economist (Australia and New Zealand), HSBC Bank Australia Ltd:</p>
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<blockquote>
<p>Timely indicators of economic conditions have generally improved in the past month. Consumer sentiment has bounced back, after having fallen sharply in response to the May Federal budget. Activity in the housing market has picked up, after having slowed around May. Business sentiment remains positive and a recent lift in business credit growth provides an early sign that corporate sector investment may be starting to lift. China’s growth has also lifted, which is providing some support for iron ore prices in the past month, following significant falls earlier in the year. </p>
<p>The labour market remained broadly steady, with the unemployment rate around the same level as at the beginning of the year. At the same time, the Q2 CPI print showed that underlying inflation remains solidly in the upper half of the 2-3% target band. Very accommodative monetary policy appears to be working and inflation is in the upper half of the target band, which provides little scope or necessity for the board to consider cutting rates further. </p>
<p>Indeed, in my view, the risk that low rates may start to drive excessive risk taking in the housing market is building, which could eventually threaten financial stability. I recommend the cash rate is left unchanged this month, but expect that the cash rate may need to be lifted in the next 6-12 months partly to prevent a housing bubble from inflating. </p>
</blockquote>
<hr>
<p>Mark Crosby, Associate Professor, Melbourne Business School:</p>
<p><strong>“Hopes for US and Europe to edge closer to normalising monetary policy.”</strong></p>
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<a href="https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
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<blockquote>
<p>There is little in the current environment to suggest anything other than sitting on one’s hands for the moment. In the six to 12 month horizon we can hope that the US and Europe continue to edge closer to normalising monetary policy, freeing up the RBA to also move rates closer to a more usual neutral rate.</p>
</blockquote>
<hr>
<p>Guay Lim, Professorial Research Fellow and Deputy Director, at the Melbourne Institute of Applied Economic and Social Research, Melbourne University:</p>
<p><strong>“Inflation is edging up, but the case for an immediate hike is not strong.”</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=490&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=490&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=491&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=491&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=491&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
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<blockquote>
<p>The case for tighter monetary policy has strengthened as inflation is edging up along with a pick-up in the growth of credit. However, the case for an immediate hike in the cash rate is not strong as growth in activity and employment remain tentative.</p>
</blockquote>
<hr>
<p>Warwick McKibbin, Professor, Australian National University, CAMA:</p>
<p><strong>“The blocking of policy reform by the Australian Senate is making a bad situation worse.”</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55616/original/8p4z3k6c-1407119339.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55616/original/8p4z3k6c-1407119339.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55616/original/8p4z3k6c-1407119339.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55616/original/8p4z3k6c-1407119339.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55616/original/8p4z3k6c-1407119339.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55616/original/8p4z3k6c-1407119339.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55616/original/8p4z3k6c-1407119339.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55616/original/8p4z3k6c-1407119339.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55615/original/9jjxksxh-1407119339.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55615/original/9jjxksxh-1407119339.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55615/original/9jjxksxh-1407119339.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55615/original/9jjxksxh-1407119339.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55615/original/9jjxksxh-1407119339.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55615/original/9jjxksxh-1407119339.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55615/original/9jjxksxh-1407119339.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55615/original/9jjxksxh-1407119339.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=468&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<blockquote>
<p>With domestic goods price inflation rising to the top of the RBA’s inflation target band and asset price inflation clearly rising to uncomfortable levels the current policy interest rate in Australia is too low. Monetary policy is too expansionary. The dilemma for the RBA is how to get back to a more neutral interest rate given global policy settings. The strong Australian dollar will continue while foreign investors search for yield and the international adjustment of monetary policies continue to drive global currencies. Clearly the policy answer lies outside the domain of monetary policy. </p>
<p>The current problem in Australia is in the settings of fiscal policy and the lack of appropriate structural adjustment policies. In a world of significant geo-political risks and economic uncertainty the blocking of policy reform by the Australian Senate is making a bad situation worse by hurting consumer confidence. There is little that monetary policy can do to negate the near term and more serious long term economic damage caused by the current political standoff.</p>
</blockquote>
<hr>
<p>James Morley, Professor, University of New South Wales, CAMA:</p>
<p><strong>“Ongoing weakness in the labour market may see the RBA hold steady.”</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55624/original/xfnrptdn-1407120320.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55624/original/xfnrptdn-1407120320.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55624/original/xfnrptdn-1407120320.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55624/original/xfnrptdn-1407120320.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55624/original/xfnrptdn-1407120320.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55624/original/xfnrptdn-1407120320.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55624/original/xfnrptdn-1407120320.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55624/original/xfnrptdn-1407120320.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55622/original/smkkcjwx-1407120319.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55622/original/smkkcjwx-1407120319.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55622/original/smkkcjwx-1407120319.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55622/original/smkkcjwx-1407120319.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55622/original/smkkcjwx-1407120319.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55622/original/smkkcjwx-1407120319.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55622/original/smkkcjwx-1407120319.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55622/original/smkkcjwx-1407120319.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=468&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<blockquote>
<p>Inflation is running at the high end of the RBA’s target range of 2-3%, with year-on-year headline inflation in June of 3.0% and underlying inflation (excluding volatile items) of 2.8%. Given these inflation numbers, the RBA needs to consider raising the policy rate in the medium term. However, unless inflation looks to actually fall outside the target range, ongoing weakness in the labour market suggests that the RBA can hold the policy rate steady in the immediate future.</p>
</blockquote>
<hr>
<p>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</p>
<p><strong>“The pressure to raise interest rates sometime next year continues to increase.”</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55625/original/b3dwt3jp-1407120512.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55625/original/b3dwt3jp-1407120512.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55625/original/b3dwt3jp-1407120512.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55625/original/b3dwt3jp-1407120512.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55625/original/b3dwt3jp-1407120512.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55625/original/b3dwt3jp-1407120512.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55625/original/b3dwt3jp-1407120512.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55625/original/b3dwt3jp-1407120512.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<blockquote>
<p>The pressure to raise interest rates sometime next year continues to increase given Australia’s inflation rate in the second quarter reached the upper limit of the RBA’s target band of 3%, that hours worked increased 0.9% despite the unemployment rate rising to 6% in June, and that output growth in the first quarter was a little above normal at 3.8%. </p>
<p>This future recommendation is supported by the fact that the US economy growth has recovered significantly in quarter 2 to 4% following its temporary weather-related drop in the previous quarter. However, as a counter-weight, the IMF has lowered its prediction a little for China ‘s growth in 2015.</p>
</blockquote>
<hr>
<p><strong><em>Click <a href="https://cama.crawford.anu.edu.au/rba-shadow-board">here</a> to view the full charts of all CAMA board members. Saul Eslake has resigned from the CAMA RBA Shadow Board and did not vote in this round.</em></strong></p>
<p><em>VERDICT FOR AUGUST: cash rate ought to remain at 2.5%.</em></p><img src="https://counter.theconversation.com/content/30082/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Timo Henckel receives funding from the Centre for International Finance and Regulation.</span></em></p>The CAMA RBA Shadow Board is a project by the Centre for Applied Macroeconomic Analysis, based at the ANU, which asks industry and academic economists what interest rate the Reserve Bank of Australia should…Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/284992014-06-27T03:01:28Z2014-06-27T03:01:28ZPalmer’s climate play and what it means for business<p>Clive Palmer has been an easy target for some to lampoon, but this week he has proved himself to be a shrewd political operator.</p>
<p>Who would have guessed that Palmer would forge a partnership with a former US Vice President and environmental warrior? Who would ever have dreamed that Al Gore, the environmental warrior, Nobel Peace Prize recipient, the teller of inconvenient truths, would be endorsing what for many people is one of the lunatic fringe minority parties uncomfortably injecting themselves into parliamentary decision- making?</p>
<p>But it happened. And Clive Palmer has managed to craft a political strategy that will likely see the carbon tax abolished, but the retention of the Green Energy Finance Corporation, the Renewable Energy Target (RET) and the Climate Change Authority. </p>
<p>He is also pushing for legislative amendments that seek to compel business to hand on the savings to consumers in the former of lower prices. Perhaps the biggest surprise was his support for a carbon trading scheme similar to the one originally promised by former Labor Prime Minister, Kevin Rudd, but with the proviso that it was only comes into operation once Australia’s trading partners established their own carbon trading schemes.</p>
<p>There is now some space for more sober assessment of it all. To begin with, it is worth noting that many unknowns remain about the details of the proposal on the table – how for instance will consumers be guaranteed price reductions will flow on? It could be an administrative nightmare – for government and for business. More likely, it will be more window dressing than a hard legislative intervention.</p>
<p>What all this means for business depends on the industry. There will be a collective sigh of relief from the renewable energy sector who see the retention of the broader framework established by Labor as critical to its continued growth and profitability. Again, Palmer has managed to attract support from an unlikely ally.</p>
<p>However, business support from other quarters is hard to find. Representing the big end of town, the Business Council of Australia has made its continued opposition to the Renewable Energy Target well known and expressed disappointment that it may now continue. For the Australian Chamber of Commerce and Industry, the major industry body representing small business, the danger lies in the prospect of the resurrection of the Carbon Trading Scheme. Both groups expressed concern that this policy shift represents a new era of ongoing uncertainty around environmental policy and its impact on business.</p>
<p>Indeed, for those sectors likely to be most affected by carbon pricing, uncertainty about the future is somewhat greater. While there was short term certainty around the carbon tax (whatever you think of its merits), if Palmer’s proposed carbon pricing scheme is to enacted, it is far from clear when and how it is to be implemented. Having no doubt spent a great deal on preparing for the existing scheme and its affect their businesses, the task may need to start again.</p>
<p>More broadly there will be growing concern among business leaders over what Clive Palmer’s growing influence on the dynamics of parliamentary politics will produce in the future. If this is any indication, PUP may provide ongoing support for Abbott’s key policy agenda items, but perhaps on terms that will test his pragmatism. </p>
<p>For business, it will be the fact that Palmer equals uncertainty that will drive a growing concern over whether government is able to deliver on the types of reforms it was hoping for. </p>
<p>For many it may be easy to see this as a one-off event – a rabbit-out-of-the-hat moment – in which the Palmer United Party has managed to manoeuvre itself into a prime position to drive the direction of policy. </p>
<p>But that may be a position that underestimates Clive Palmer’s ability to find novel solutions to hairy political problems. After all, his rise as a businessman has been built on just this sort of acumen.</p><img src="https://counter.theconversation.com/content/28499/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Gahan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Clive Palmer has been an easy target for some to lampoon, but this week he has proved himself to be a shrewd political operator. Who would have guessed that Palmer would forge a partnership with a former…Peter Gahan, Professor of Management + Director, Centre for Workplace Leadership, Faculty of Business and Economics, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/195462013-11-12T02:54:51Z2013-11-12T02:54:51ZAbbott’s ‘open for business’ honeymoon is over<figure><img src="https://images.theconversation.com/files/34967/original/wcxn8whs-1384218351.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Treasurer Joe Hockey admits the government's 'open for business' promise must be followed up with action.</span> <span class="attribution"><span class="source">Alan Porritt/AAP</span></span></figcaption></figure><p>From a three-and-a-half year high last month, business confidence <a href="http://business.nab.com.au/monthly-business-survey-october-2013-5029/">data</a> for October shows the post-election honeymoon is over, with business conditions continuing to underperform in non-mining sectors.</p>
<p>As Treasurer Joe Hockey recognised in his “Australia: Open for Business” speech in New York last month, the initial positive reaction of business to the change of government needs to be matched up with action. After all, slogans only go so far.</p>
<p>Australia’s lack of competitiveness, and its impact on investment and business confidence, is not only a result of the high Australian dollar caused by the mining boom, but is also to some degree self-imposed. </p>
<p>Chiefly among the culprits for the lack of competitiveness are the increased burden of regulation, a cumbersome Industrial Relations system, a tax system in need of reform, and our ambivalent attitude towards foreign investment. </p>
<p>There are some encouraging signs that an “open for business” agenda has begun to take shape. In a recent speech at the Sydney Institute, Parliamentary Secretary to the Prime Minister Josh Frydenberg <a href="http://www.joshfrydenberg.com.au/guest/SpeechesDetails.aspx?id=225">articulated</a> a well-thought through deregulation agenda. Deregulation may be an important first step toward increasing our competitiveness and encouraging investment.</p>
<h2>The need for deregulation</h2>
<p>The increased burden of regulation is well documented and mostly pre-dates Kevin Rudd’s 2007 election. The last six years arguably saw a steep increase in the pervasiveness of regulation with a number of high profile legislative changes such as the carbon tax, the mining tax and changes to the Fair Work Act, bypassing the regulatory impact statement process. </p>
<p>In the latest <a href="http://www.weforum.org/issues/global-competitiveness">Global Competitiveness Report</a> published by the World Economic Forum, Australia ranked 128 out of 148 countries in terms of the burden of government regulation. I would not take this ranking too seriously – for example China ranks 14 and Vietnam 106 – as it is based on perceptions that are not easily transferable across different cultures. Nonetheless, the increased burden of government regulation is a reality. </p>
<p>One example is that of food manufacturer Simplot and its <a href="http://catallaxyfiles.com/2013/11/04/fair-toss-of-the-pancake-only-in-australia-elephant-in-the-room/">struggle</a> to gain authorisation from Biosecurity Australia to import pancake “pods”. </p>
<p>Given the need for deregulation to reduce the heavy cost of regulatory compliance, the next question is how to go about it.</p>
<h2>What it takes to deregulate</h2>
<p>The recipe for a successful deregulation program is neither new or untried. It includes a concerted effort to repeal existing, ineffective regulation.</p>
<p>One of my favourites stories about excessive regulation involves Law no 9502 enacted by the Sao Paulo City Council in 1997. This law mandates that signs be posted next to lifts requiring users to check whether the lift is there before walking into it. Millions of dollars are spent to meet this legislative requirement with no significant impact on behaviour. </p>
<p>As the Simplot example above highlights, there are likely to be many opportunities for the federal government to eliminate ineffective but costly regulations. </p>
<p>There are also opportunities to avoid duplication and better coordinate with states and territories. Some states such as Queensland have already been quietly but steadily working through a similar deregulation agenda.</p>
<p>Another important element of a successful deregulation program includes ensuring that new regulation, no matter how politically important, is subject to a rigorous cost-benefit analysis in the form of a regulatory impact statement. While it is well understood that cost-benefit analysis is very sensitive to assumptions, a key benefit of requiring a regulatory impact statement is that it forces government bureaucrats to identify the range of costs and benefits and, in the process, increases the scrutiny of a policy decision or new regulation. </p>
<p>Finally, the new government deregulation agenda should also include a commitment to an ex-post evaluation of regulation. This is now common practice in other developed countries and is part of the process of ensuring that regulators are held accountable for their decisions. </p>
<p>It could be argued the introduction of an ex-post assessment of a regulatory decision would make the regulator’s job more difficult and costly, as it would be expensive and complex to undo decisions that have been proven to be mistaken. This line of argument, however, misses the key point. The requirement for an ex-post assessment incentivises the regulator to get it right in the first place. </p>
<p>Overall, the deregulation agenda, while an important first step towards developing an open for business strategy, is to some extent the low hanging fruit. The hard yards, which have a much higher impact on investment and business confidence, are changes in the industrial relations system, tax reform and the treatment of foreign investment. </p>
<h2>A more ambitious, politically challenging agenda</h2>
<p>Despite existing rhetoric, real unit labour costs (non-farm) fell steadily between 1985 and 2010, and have remained broadly stable since then. This means that it may be possible that a more efficient industrial relations system could lead to a better allocation of resources and lower business costs while maintaining real wages at current levels. Framing industrial relations reform along these lines might provide a starting point for a foreshadowed review of the Fair Work Act by the Productivity Commission. </p>
<p>An open for business agenda must necessarily encompass tax reform. The BCA seems to prefer a wider base, lower rate approach. A proposed approach is to finance a reduction in the corporate tax rate via extending the GST to cover food, health and education. For consistency, such an approach should also include eliminating a range of existing tax concessions that have eroded the tax base. The politics of such an approach would, however, be very difficult.</p>
<p>I have <a href="http://theconversation.com/reduce-the-corporate-tax-rate-not-so-fast-4014">argued</a> elsewhere for a more ambitious change in the tax system involving the introduction of an Allowance for Corporate Equity (ACE), which would enable firms to deduct an imputed return on equity. The key conclusion is that tax reform is a long and hard road and will certainly test the government’s commitment to an open for business agenda.</p>
<p>Another thorny issue that will test the government’s commitment is its apparent ambivalent attitude towards foreign investment. This is illustrated by the divisions within the Coalition on whether the Treasurer should allow the acquisition of GrainCorp by Archer Daniels Midland despite its clearance by the ACCC from a competition perspective. A clear statement by the Treasurer when he makes his decision on the 17th of December could go a long way in establishing the government’s credentials as business friendly. </p>
<p>Whilst the change of government has sparked business confidence, the new government must capitalise on this momentum by taking definitive policy action. </p>
<p>There are many opportunities for policy change towards an open for business agenda for Australia, through deregulation and tax reform in particular. </p>
<p>Initial signs show that deregulation is on the agenda and this would be an important start. But broad based changes that encompass reforms to the industrial relations system, foreign investment policy and the tax system, whilst more difficult to achieve, are crucial for promoting a business-friendly environment in Australia. </p><img src="https://counter.theconversation.com/content/19546/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Flavio Menezes does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>From a three-and-a-half year high last month, business confidence data for October shows the post-election honeymoon is over, with business conditions continuing to underperform in non-mining sectors…Flavio Menezes, Professor of Economics, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/187992013-10-02T01:36:35Z2013-10-02T01:36:35ZBusiness survey signals good times ahead, while they last<figure><img src="https://images.theconversation.com/files/32274/original/55pz2zbx-1380671332.jpg?ixlib=rb-1.1.0&rect=0%2C311%2C5616%2C3430&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Retail trade is up by a "surprisingly robust" 0.4%, and business confidence continues to grow.</span> <span class="attribution"><span class="source">AAP/Yvette Kelly</span></span></figcaption></figure><p>The <a href="http://dnb.com.au/library/scripts/objectifyMedia.aspx?file=pdf/69/73.pdf">national survey of business expectations</a> for the December quarter is out and it’s certain to bring happy smiles to the newly-elected government.</p>
<p>Businesses are expecting sales to increase in the coming months with the sales expectation index climbing from 4.9 to 7.9 points. Prices are also predicted to tick up as the recent fall in the Australian dollar takes the pressure off businesses to match cheaper import prices. </p>
<p>As a result, businesses are expecting profits to rise strongly and erase the decline experienced in the period leading up to the federal election.</p>
<p>While the weaker Australian dollar has undoubtedly played a role, a number of factors at home and abroad are contributing to a rising confidence in the business community.</p>
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<a href="https://images.theconversation.com/files/32271/original/mnyycgq5-1380669622.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/32271/original/mnyycgq5-1380669622.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/32271/original/mnyycgq5-1380669622.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=347&fit=crop&dpr=1 600w, https://images.theconversation.com/files/32271/original/mnyycgq5-1380669622.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=347&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/32271/original/mnyycgq5-1380669622.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=347&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/32271/original/mnyycgq5-1380669622.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=437&fit=crop&dpr=1 754w, https://images.theconversation.com/files/32271/original/mnyycgq5-1380669622.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=437&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/32271/original/mnyycgq5-1380669622.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=437&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The business outlook for the final quarter of 2013 has improved for the key areas of sales and earnings, with the profits outlook noticeably stronger than in Q4 2012 and Q4 2011: report.</span>
<span class="attribution"><span class="source">Dun & Bradstreet</span></span>
</figcaption>
</figure>
<p>All the major economies in the world are slowly but steadily picking up strength.</p>
<p>In the US, growth has been strong enough to trim the unemployment rate to 7.3% down from 10% three years ago. At the same time, it has not been strong enough to convince the Federal Reserve to unwind its funding of the government deficit via its massive bond buying program. </p>
<p>Europe has also turned a corner and is showing some green shoots, prompting the OECD to lift its growth forecasts for the entire region.</p>
<p>Closer to home and more importantly for the Australian economy, China’s growth appears to have stabilised after a sharp and worrying deceleration earlier this year. According to the IMF’s latest update, it is now expected to reach 7.75% for this year.</p>
<p>While the pace of economic expansion is a far cry from the booming years that preceded the global financial crisis, the key point is that the major risks seem to have dissipated. Even the large current account deficits in some emerging markets, like India, are considered unlikely to derail the global recovery. This conviction is starkly reflected in the recent behaviour of gold prices.</p>
<p>After a sharp drop back in April this year, when it lost 13% in two days, gold has failed to attract bargain hunters, which clearly indicates that investors are confident the worst is behind us.</p>
<p>And if the world economy is doing well, history informs us that the Australian economy will thrive.</p>
<p>On the domestic front, the Coalition’s recent victory is good news for businesses.</p>
<p>The decision to repel the carbon tax and the mining tax is not only a gift to business magnates, but it drives home the point that they will not be impeded in any way by possible long-term concerns, be it for the environment or for public health. </p>
<p>In other words, the government’s centrepiece is to reduce the cost of doing business and to remove impediments to growth whilst non-business related issues are brushed aside in the name of economic efficiency.</p>
<p>Obviously, business confidence requires confident customers. Here, the message has been to assure households that the soaring costs of living will be contained and may even decrease without the carbon tax.</p>
<p>All the while, the government has made clear that it had no intention to change tax rules pertaining to superannuation and housing finance. Negative gearing which disproportionately benefits investors at the expense of first home buyers and young families will not be touched.</p>
<p>By pledging not to do anything, the government has actually done a lot even before it took office. It has given households a dose of certainty and the confidence to proceed with their investment and consumption decisions.</p>
<p>After months of hesitation, household have finally started to open their wallets. Retail sales figures released yesterday took economists by surprise by recording a robust 0.4% increase. </p>
<p>The Westpac/Melbourne Institute Index of consumer sentiment already hinted at an increase in consumer confidence. The upbeat mood is also evident in the buoyant housing market with prices in Sydney (+5.2%) and Melbourne (+5.0%) rising strongly over the last quarter.</p>
<p>This optimism feeds back into greater business confidence and should spark a virtuous circle. In the short run, the economy is thus set to do well despite some strong headwinds coming from the completion or cancellation of several large-scale mining projects.</p>
<p>In the long run, however, the situation is fraught with danger. </p>
<p>It may be useful to remind that the relaxation of financial regulation in the US also promoted growth as more households were encouraged to borrow and buy homes. Similarly, European governments though they could ward off recessions by borrowing and leaving the debt to future taxpayers.</p>
<p>The government is attempting a new trick: to stimulate the economy without increasing the fiscal deficit by taking away from future generations. It may well succeed and win a second term. But will this new trick work when the others have eventually failed?</p><img src="https://counter.theconversation.com/content/18799/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pascal Nguyen does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The national survey of business expectations for the December quarter is out and it’s certain to bring happy smiles to the newly-elected government. Businesses are expecting sales to increase in the coming…Pascal Nguyen, Senior lecturer in Finance, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.