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 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.
As a result, businesses are expecting profits to rise strongly and erase the decline experienced in the period leading up to the federal election.
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.
All the major economies in the world are slowly but steadily picking up strength.
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.
Europe has also turned a corner and is showing some green shoots, prompting the OECD to lift its growth forecasts for the entire region.
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.
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.
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.
And if the world economy is doing well, history informs us that the Australian economy will thrive.
On the domestic front, the Coalition’s recent victory is good news for businesses.
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.
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.
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.
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.
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.
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.
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.
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.
In the long run, however, the situation is fraught with danger.
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.
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?