tag:theconversation.com,2011:/global/topics/consumer-confidence-974/articlesConsumer confidence – The Conversation2024-03-04T17:03:16Ztag:theconversation.com,2011:article/2248872024-03-04T17:03:16Z2024-03-04T17:03:16ZTax cuts in an election year? They can boost consumer confidence and work wonders for a governing party<p>A budget in the year of an election is a big moment for any government. In 2024, it could be the chancellor of the exchequer’s <a href="https://www.bbc.co.uk/news/business-68359756">last chance</a> to try and generate a sense of economic optimism and improve <a href="https://www.tandfonline.com/doi/full/10.1080/00036846.2017.1363859">consumer confidence</a> after years of <a href="https://theconversation.com/price-inflation-is-slowing-but-heres-why-it-still-feels-like-were-in-a-cost-of-living-crisis-218055">households feeling squeezed</a> by austerity measures and rising prices. </p>
<p>Jeremy Hunt will also be mindful of reviving the electoral fortunes of the Conservative Party – and keeping his job. </p>
<p>His predecessors have faced similar challenges. And several chancellors of Conservative governments have decided to remove the financial brakes when a general election is imminent, to make people feel a little better off. </p>
<p>My research looks at how <a href="https://www.tandfonline.com/doi/full/10.1080/00036846.2019.1659489">people feel</a> about their economic prospects, and how this is linked to the way they behave as consumers. And a brief look at <a href="https://www.researchgate.net/publication/222958654_Income_tax_and_elections_in_Britain_1950-2001">election year budgets</a> from the past suggests that tax cuts can make voters feel more positive about a governing party. </p>
<p><a href="https://www.semanticscholar.org/paper/The-Chancellors%3A-A-history-of-the-Chancellors-of-Dell/fc3ea870901100686f1801ed928443f36443b801">Richard Austen Butler</a> for example, was chancellor in the early 1950s, serving prime ministers Winston Churchill and Anthony Eden. For his final budget in April 1955, Butler decided to significantly reduce income tax rates. </p>
<p>The election was held the following month, and the Conservative Party won <a href="https://link.springer.com/book/9780333778678">with an increased majority</a>. </p>
<p>This was a prime example of a chancellor attempting to manipulate the economy to enhance his political party’s prospects. But from a macroeconomic perspective (looking at the UK economy as a whole), the 1955 budget was widely considered to <a href="https://academic.oup.com/book/26665/chapter-abstract/195428871?redirectedFrom=fulltext">be misguided</a>. For the tax relief Butler provided came at a time of an <a href="https://www.imf.org/external/pubs/ft/fandd/2013/09/basics.htm">economic boom</a>, when supply couldn’t keep pace with demand, which led to inflationary pressure. </p>
<p>Towards the end of the same decade, it was Derick Heathcoat Amory in the economic hot seat, dealing with prime minister Harold Macmillan’s <a href="https://academic.oup.com/book/4399/chapter-abstract/146363564?redirectedFrom=fulltext">perpetual fear of an economic slump</a>. </p>
<p>Although there were concerns about the consequences for inflation and the UK’s balance of payments, in April 1959, Amory delivered what economists call an “expansionary budget” – increasing spending and cutting taxes. Six months on, the Conservatives won another general election. </p>
<h2>Howe to do it</h2>
<p>Twenty years later, when Margaret Thatcher moved into No 10 Downing Street in May 1979, she appointed Geoffrey Howe as chancellor. During his time in office, any unpopular or controversial measures – including public spending cuts and tax increases – happened in his first three budgets. </p>
<p>This allowed him to present more attractive policies in the one that immediately preceded the next general election.</p>
<p>By the time of his final budget, in <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1468-0289.2007.00394_16.x">March 1983</a>, Howe felt that inflation and the government’s finances were sufficiently under control to grant widespread tax cuts, including to North Sea oil companies and small businesses. The general election in June 1983 saw the Conservative Party win an <a href="https://www.jstor.org/stable/20002569">overwhelming victory</a> (also helped by <a href="https://www.jstor.org/stable/193822">increased popularity</a> after the Falklands war).</p>
<p>Nigel Lawson then replaced Howe as chancellor, in relatively favourable economic circumstances. He went on to pursue a tax cutting agenda, believing that increasing the incentive to work would reduce unemployment. </p>
<p>For his <a href="https://www.jstor.org/stable/24436288">1987 budget in March</a>, preceding a general election in June, Lawson cut income tax, reduced fuel duty, and brought down the the tax rate for small businesses. His actions helped the Conservatives win another overwhelming victory in the election. </p>
<p>After John Major became prime minister in 1990, he appointed Norman Lamont as chancellor under difficult economic circumstances. </p>
<h2>Consumer confidence trick?</h2>
<p>A recession was officially declared in January 1991 – which continued until April 1993. Meanwhile, when Lamont delivered his <a href="https://onlinelibrary.wiley.com/doi/10.1111/j.1468-0319.1992.tb00271.x">second budget</a> on March 10 1992, ahead of a general election in April, a key feature was the introduction of a new, lower 20% rate of tax on the first £2,000 of taxable income. </p>
<p>Again, the Conservatives won. Members of the Institute for Fiscal Studies later <a href="https://ifs.org.uk/articles/taxes-and-elections-are-they-any-chance-related">described that budget</a> as the “clearest example of pre-election tax cuts followed by post-election tax rises”. </p>
<p>But it worked. And all of these examples might provide Hunt with <a href="https://www.theguardian.com/business/2024/mar/02/toxic-budgets-the-uk-chancellors-who-left-a-poisonous-legacy">strong encouragement</a> to ignore fiscal rectitude when it comes to preparing his 2024 budget. A tax cut would likely promote an increase in consumer confidence, which <a href="https://onlinelibrary.wiley.com/doi/10.1111/manc.12395">motivates households to buy things</a>.</p>
<p>Yet Hunt is unlikely to forget that he was given his job after the <a href="https://theconversation.com/mini-budget-lessons-from-the-uks-long-history-of-economic-crises-191696">financial chaos</a> caused by the so-called “mini-budget” delivered by Kwasi Kwarteng – then the chancellor during Liz Truss’s short premiership – in September 2022. </p>
<p>So an array of unfunded tax cuts is not an option. </p>
<p>It would be very surprising though, if Hunt didn’t try to make voters <a href="https://data.sca.isr.umich.edu/fetchdoc.php?docid=37479">feel a little better off</a> ahead of a general election. The prime minister maintains that the trajectory is <a href="https://www.theguardian.com/politics/2024/jan/07/rishi-sunak-says-he-wants-to-cut-workers-taxes-this-year-and-may-reduce-benefits">lower taxes</a>, and his desire to reward people who work would suggest another reduction in national insurance payments. </p>
<p>While this may not be the most prudent form of action, it may yet provide households with a sliver of economic confidence – and a boost to the Conservative’s chances of winning another election.</p><img src="https://counter.theconversation.com/content/224887/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Gausden 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>A short history of reducing tax burdens and winning elections.Robert Gausden, Senior Lecturer in Economics, University of PortsmouthLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2198582024-01-05T16:14:55Z2024-01-05T16:14:55ZConsumer confidence is rising amid gloomy economic news – here’s what that means and why it matters<figure><img src="https://images.theconversation.com/files/567594/original/file-20240102-27-kfpc1i.jpg?ixlib=rb-1.1.0&rect=23%2C39%2C5268%2C3464&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/busy-city-street-people-on-zebra-182220608">Photomika-com/Shutterstock</a></span></figcaption></figure><p>People’s confidence in the UK’s economic outlook <a href="https://www.gfk.com/press/nov-uk-consumer-confidence-stages-end-of-year-rally">improved</a> towards the end of 2023, despite continuing to battle a cost-of-living crisis. Although it has strengthened over the year to December, “consumer sentiment” as this confidence is called, is still <a href="https://www.gfk.com/press/christmas-cheer-sees-december-headline-score-up-two-points-at-22">in negative territory</a>.</p>
<p>Indeed, UK consumer price inflation remains well above the Bank of England’s 2% target and interest rates are at highs not seen since the wake of the global financial crisis in 2008?. And, of course, the outlook for the UK economy in 2024 is also <a href="https://www.theguardian.com/business/live/2023/dec/19/uk-economy-at-risk-of-hard-landing-warning-ftse-pound-eurozone-inflation-pimco">in the doldrums</a>.</p>
<p>British economist John Maynard Keynes talked about <a href="https://www.economicshelp.org/animal-spirits/">“animal spirits”</a> meaning the psychological factors that drive firm’s investment decisions. But economists also take people’s feelings into account when making predictions about the direction of the economy. So, with consumer confidence rising in spite of all of these negative indicators, what role does this kind of optimism play in economic forecasts?</p>
<p>Traditionally, when trying to gauge the country’s financial prospects, economists focused on households’ ability to consume, <a href="http://dx.doi.org/10.1111/j.1467-9957.2012.02333.x">arguing that</a> expectations of <a href="http://dx.doi.org/10.1016/j.jmacro.2004.03.001">future household income</a> are a crucial determinant of people’s current consumption. For instance, you’ll be more reluctant to splash out now if you think inflation is going to sky-rocket next year, squeezing your finances in the future. </p>
<p>But willingness to consume is also increasingly important to economists, especially during difficult times. Such “consumer sentiments” describe the psychological state of households, or people, rather than the present reality of their personal finances. When economists know people are optimistic about the economy, they assume they are more willing to spend or consume more and, if not, they are expected to save more instead.</p>
<p>In the US, consumer sentiment is tracked by the University of Michigan’s <a href="https://data.sca.isr.umich.edu/">Surveys of Consumers</a>, which is based on a monthly poll of a sample of households. UK consumer sentiment is represented by the <a href="https://www.gfk.com/products/gfk-consumer-confidence-barometer">GfK Consumer Confidence Barometer</a>, also a monthly survey of households. </p>
<p>Both measures ask people about their personal finances and their thoughts on the general economy. Participants are asked about plans for large purchases, especially durables such as white goods and cars, as well as their views about what has happened in the past year (backward-looking) and their opinion of prospects over the next year (forward-looking). The US index is more focused on households’ forward-looking views, at least with regards to the overall economy.</p>
<figure class="align-center ">
<img alt="Woman standing between two rows of new washing machines in a shop." src="https://images.theconversation.com/files/567596/original/file-20240102-19-sy2cdn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/567596/original/file-20240102-19-sy2cdn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/567596/original/file-20240102-19-sy2cdn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/567596/original/file-20240102-19-sy2cdn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/567596/original/file-20240102-19-sy2cdn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/567596/original/file-20240102-19-sy2cdn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/567596/original/file-20240102-19-sy2cdn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Economists are interested in people’s future spending plans for large items like washing machines.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/hard-decision-lady-choosing-between-two-2116392398">UfaBizPhoto/Shutterstock</a></span>
</figcaption>
</figure>
<h2>Why are these consumer surveys so important?</h2>
<p>People’s willingness to spend money is affected by <a href="https://doi.org/10.1002/jae.2494">special or extreme events</a>. The financial crisis of 2007-08, the COVID pandemic and Russia’s invasion of Ukraine all dragged down consumer sentiment.</p>
<p><a href="http://dx.doi.org/10.1016/j.jmacro.2009.12.002">Recent research</a> also shows that good and bad news has an uneven effect on consumer sentiment. In particular, good news about the general economy will have a greater and more lasting impact than bad news.</p>
<p>In the US, for example, recent good news about jobless rates falling to the lowest point since July, together with the future prospect of lower inflation, has boosted households’ willingness to consume. After falling continually for the preceding four months, US consumer sentiment increased sharply in December. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/566907/original/file-20231220-29-ibs01t.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart with line (representing consumer confidence) falling recently and then rising again in the last month." src="https://images.theconversation.com/files/566907/original/file-20231220-29-ibs01t.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/566907/original/file-20231220-29-ibs01t.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=360&fit=crop&dpr=1 600w, https://images.theconversation.com/files/566907/original/file-20231220-29-ibs01t.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=360&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/566907/original/file-20231220-29-ibs01t.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=360&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/566907/original/file-20231220-29-ibs01t.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=452&fit=crop&dpr=1 754w, https://images.theconversation.com/files/566907/original/file-20231220-29-ibs01t.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=452&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/566907/original/file-20231220-29-ibs01t.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=452&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Consumer confidence in the US economy has risen in recent months.</span>
<span class="attribution"><a class="source" href="https://data.sca.isr.umich.edu/">Author provided using data from Survey of Consumers, University of Michigan</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
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<p>The US Federal Reserve has indicated that <a href="https://www.cnbc.com/2023/12/13/fed-interest-rate-decision-december-2023.html">interest rates will be held</a> and perhaps even fall in 2024 as inflationary pressures ease. So, the outlook for an easing of inflationary pressures once recent interest rate rises take full effect seems to have had a positive effect on consumer sentiment.</p>
<h2>A gloomier outlook for the UK economy</h2>
<p>The picture in the UK is somewhat different. While inflationary pressures have eased recently, the <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/november2023#main-points">current rate</a> of 3.9% is still well above the Bank of England’s 2% target. Also, unlike the US Federal Reserve, the Bank of England is less likely to cut interest rates anytime soon, while recent data on <a href="https://www.bbc.co.uk/news/business-67690287">economic growth has been disappointing</a>. In October, the economy shrank by 0.3% and unemployment rates are currently around 4.3%, with pay growth easing.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/566910/original/file-20231220-17-4ord34.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart with zig-zagging line (recently), showing an upward turn most recently." src="https://images.theconversation.com/files/566910/original/file-20231220-17-4ord34.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/566910/original/file-20231220-17-4ord34.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=342&fit=crop&dpr=1 600w, https://images.theconversation.com/files/566910/original/file-20231220-17-4ord34.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=342&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/566910/original/file-20231220-17-4ord34.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=342&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/566910/original/file-20231220-17-4ord34.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=430&fit=crop&dpr=1 754w, https://images.theconversation.com/files/566910/original/file-20231220-17-4ord34.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=430&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/566910/original/file-20231220-17-4ord34.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=430&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Consumer confidence in the UK remains in negative territory but people are feeling more optimistic.</span>
<span class="attribution"><a class="source" href="https://www.gfk.com/press/nov-uk-consumer-confidence-stages-end-of-year-rally">Author provided using data from GfK</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
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<p>Nevertheless, consumer confidence has increased in the last two months, after a sharp fall in October. That decrease may have been due to the Gaza conflict and fears about its potential impact on the global economy.</p>
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<p>So, both UK and US consumers seem to feel fairly optimistic about their personal finances and the wider economy right now. The obvious common factor among the two economies is the easing of inflationary pressures, which many people will be hoping will reduce the pressures of the cost of living crisis. But even though confidence is growing, neither country is out of the woods yet when it comes to the economic outlook.</p><img src="https://counter.theconversation.com/content/219858/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Joshy Easaw received a Leverhulme Research Fellowship from October 2007 to September 2008 to study: ‘Microfoundations of how households form subjective macroeconomic expectations: The role of news’.</span></em></p>Levels of consumer confidence can signal people’s future spending plans and the likely impact on the economy.Joshy Easaw, Professor of Economics, Cardiff UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1367822020-04-21T12:43:39Z2020-04-21T12:43:39ZHow the coronavirus economic crisis could hit Donald Trump’s re-election prospects<p>The US currently has the <a href="https://coronavirus.jhu.edu/map.html">highest number of coronavirus cases</a> in the world and the highest number of deaths. </p>
<p>Many commentators claim that President Donald Trump’s reaction to the mounting health crisis has been <a href="https://www.theguardian.com/us-news/2020/mar/28/trump-coronavirus-misleading-claims">confused and incoherent</a>. Despite this, the crisis has produced a “rally round the president” effect in public opinion. </p>
<p>The graph below tracks the average percentage of Americans in monthly Gallup Polls who <a href="https://www.realclearpolitics.com/epolls/other/president_trump_job_approval-6179.html">approve or disapprove</a> of the job Trump has been doing since his inauguration. Presidential approval ratings have rallied in the past when the US has faced significant crises. 9/11 was a good example, with support for President George W Bush, <a href="https://www.presidency.ucsb.edu/statistics/data/presidential-job-approval">skyrocketing from 56% to 88%</a> between August and October 2001.</p>
<p><strong>Trump’s job approval ratings</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/329131/original/file-20200420-152591-qqpttx.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/329131/original/file-20200420-152591-qqpttx.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/329131/original/file-20200420-152591-qqpttx.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/329131/original/file-20200420-152591-qqpttx.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/329131/original/file-20200420-152591-qqpttx.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/329131/original/file-20200420-152591-qqpttx.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/329131/original/file-20200420-152591-qqpttx.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/329131/original/file-20200420-152591-qqpttx.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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<span class="caption">Percentages who approve or disapprove of the job President Trump is Doing, January 2017 – March 2020.</span>
<span class="attribution"><a class="source" href="https://www.realclearpolitics.com/epolls/other/president_trump_job_approval-6179.html">Gallup Poll monthly averages</a>, <span class="license">Author provided</span></span>
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<p>Following his inauguration in January 2017, Trump’s job approval ratings fell rapidly, and there was a gap of minus 22% between approval and disapproval by August of that year. His ratings then gradually improved only to crash again following the mid-term Congressional elections in November 2018 when the Republicans <a href="https://theconversation.com/us-midterm-results-six-key-issues-and-what-they-mean-for-the-countrys-uncertain-future-106467">lost control</a> of the House of Representatives to the Democrats.</p>
<p>Since the coronavirus pandemic emerged, public opinion has rapidly shifted and more Americans now perceive the virus as a serious threat to public health and the US economy, according to <a href="https://www.people-press.org/2020/03/26/worries-about-coronavirus-surge-as-most-americans-expect-a-recession-or-worse">Pew Research Centre data</a>. Despite this, Trump’s job approval ratings have improved in recent weeks with some polls giving him a positive net rating for the first time since his inauguration.</p>
<p>Does this mean that Trump will be re-elected in November on a wave of public endorsements of his handling of the crisis? Our statistical analyses suggest not.</p>
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Read more:
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<h2>Falling consumer confidence</h2>
<p>Efforts to combat the coronavirus have sent the American economy into a tailspin, with <a href="https://www.theguardian.com/business/2020/apr/16/us-unemployment-coronavirus-economic-toll-jobless">22.2 million people</a> filing for unemployment in the four weeks since March 14. This is the highest number on record, far surpassing the previous high of 6.6 million unemployed in May 2009 during the <a href="https://books.google.co.uk/books/about/End_This_Depression_Now.html?id=VVi3qB6vmW0C&redir_esc=y">depths of the great recession</a>.</p>
<p>Our forecasting model is known as an error correction time series model which we <a href="https://www.cambridge.org/gb/academic/brexit-why-britain-voted-leave-european-union">used to analyse the relationship</a> between the state of the economy and attitudes to Brexit in the UK over more than a decade. If we apply it to the task of modelling the relationship between Trump’s job approval ratings and consumer confidence in the US, his ratings will fall sharply by the time of the election if the economy continues to crash. This is illustrated in the graph below, where the red line is the forecast and the blue lines measure our confidence in it. </p>
<p>The forecast is based on the <a href="https://www.jstor.org/stable/4092279?seq=1#metadata_info_tab_contents">relationship</a> between presidential approval and consumer confidence over 506 months going back to January 1978. Consumer confidence is measured using the <a href="http://www.sca.isr.umich.edu">Michigan Index of Consumer Sentiment</a>, a widely used index of public attitudes about the state of the economy. A high score on the index means that Americans are optimistic about the economy and a low score that they are pessimistic. </p>
<p>The consumer confidence index fell sharply from 101 to 89 between February and March 2020. This is the fourth largest one-month decline in nearly half a century and <a href="https://www.people-press.org/2020/03/26/worries-about-coronavirus-surge-as-most-americans-expect-a-recession-or-worse">recent Pew survey</a> shows that 65% of Americans expect a recession or even a depression in the months ahead. </p>
<p>In our forecast we assume that a sharp economic downturn will occur, and that the consumer confidence index will fall to 55 in April, as it did in November 2008 during the financial crash. In December 2008, it recovered up to 60, but by February the following year it had fallen again to 56. Overall, the index is fairly volatile but the current sharp decline in the US economy is much more likely to make it fall rather than increase before this year’s election. </p>
<p>Our model assumes that if the index stayed at 55 until the November presidential election, Trump’s job approval would decrease to 37.2%.</p>
<p><strong>Where Trump’s approval ratings could go</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/329149/original/file-20200420-152576-1y9e3pi.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/329149/original/file-20200420-152576-1y9e3pi.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/329149/original/file-20200420-152576-1y9e3pi.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=363&fit=crop&dpr=1 600w, https://images.theconversation.com/files/329149/original/file-20200420-152576-1y9e3pi.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=363&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/329149/original/file-20200420-152576-1y9e3pi.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=363&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/329149/original/file-20200420-152576-1y9e3pi.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=456&fit=crop&dpr=1 754w, https://images.theconversation.com/files/329149/original/file-20200420-152576-1y9e3pi.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=456&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/329149/original/file-20200420-152576-1y9e3pi.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=456&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Dynamic forecast of Trump’s job approval rating from March to November 2020.</span>
<span class="attribution"><span class="source">Author calculations</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Our analysis indicates that when consumer confidence is high, Americans are optimistic and reward the president for his performance, and when it is low they become pessimistic and punish him. This relationship can be disturbed temporarily by events such as international crises and wars (which we take into account), but presidential approval and consumer confidence continue to track each other as the effects of such events gradually dissipate.</p>
<h2>Election prospects</h2>
<p>If Trump’s job approval rating did fall to 37.2%, this would translate into an electoral disaster for him. Although it is not the only factor at work in any particular election, a president’s job approval rating is always crucial.</p>
<p>In an accompanying analysis we used historical data on the popular vote – which we employ as a proxy for presidential approval – and seats won in the electoral college between 1920 and 2016 to model how many electoral college seats Trump could be expected to win if his job approval rating was at 37.2% in November 2020. If he won this same percentage of the popular vote, our model indicates that he would win only 55 electoral college seats, <a href="https://theconversation.com/how-is-the-american-president-elected-67632">far below the 270 needed</a> to remain in the White House. </p>
<p>Consumer confidence does not need to be so extremely pessimistic for the president to be in serious trouble. Trump has a strong base of supporters and his approval rating has seldom fallen below 40% during his term in office. If most of these people continue to view his efforts positively and the consumer index falls only half as much (to 73 points rather than 55 until November), we predict Trump would get 43.7% of the popular vote and 181 electoral college votes – again a decisive defeat.</p>
<p>A third scenario underscores how the president’s re-election chances hinge on an economic recovery and the increasingly sanguine consumer confidence it would generate. If we assume that consumer sentiment follows a V-shaped path, falling to 55 in April but then gradually recovering to 101 in October (where it was in February), our model shows that Trump gets a slim majority – 50.9% – of the popular vote. This translates into 320 electoral college votes, and Trump’s re-election.</p>
<p>Taken together, these forecasts emphasise the importance of a healthy economy for Trump’s prospects of a second term. Clearly, he would be in serious trouble if there is a major erosion of consumer confidence. He won in 2016 with <a href="https://edition.cnn.com/election/2016/results/president">46% of the popular vote</a>, but only with extremely narrow victories in Michigan, Pennsylvania and Wisconsin. These manufacturing states of the so-called rust belt are likely to be hard hit by a protracted recession, so consumer confidence and the presidential approval ratings it generates could be even lower in such places than elsewhere. </p>
<p>The upshot is that while a number of Americans have rallied around the president in reaction to the coronavirus crisis, this may not last if the economy is in recession and consumer confidence plummets.</p><img src="https://counter.theconversation.com/content/136782/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Paul Whiteley receives funding from the Economic and Social Research Council and the British Academy</span></em></p><p class="fine-print"><em><span>Harold D Clarke has received funding from the National Science Foundation (U.S.)</span></em></p>Donald Trump’s job approval ratings may be holding, but consumer confidence matters for his re-election prospects.Paul Whiteley, Professor, Department of Government, University of EssexHarold D Clarke, Ashbel Smith Professor, School of Economic, Political and Policy Sciences, University of Texas at DallasLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1307992020-02-03T18:57:41Z2020-02-03T18:57:41ZThe evidence suggests Reserve Bank rate cuts don’t hurt confidence<figure><img src="https://images.theconversation.com/files/313027/original/file-20200131-41541-8u47zx.jpg?ixlib=rb-1.1.0&rect=668%2C182%2C3140%2C1690&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock/RBA</span></span></figcaption></figure><p>When the Reserve Bank board meets today for the first time this year it is likely to leave its cash rate unchanged at the current all-time low 0.75%.</p>
<p>Afterwards, it will announce its <a href="https://www.rba.gov.au/monetary-policy/int-rate-decisions/2019/">reasons</a>, many of them good. But they’ve not always been good.</p>
<hr>
<p><strong>Reserve Bank cash rate</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/312974/original/file-20200130-41495-16dmxfk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/312974/original/file-20200130-41495-16dmxfk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/312974/original/file-20200130-41495-16dmxfk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=158&fit=crop&dpr=1 600w, https://images.theconversation.com/files/312974/original/file-20200130-41495-16dmxfk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=158&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/312974/original/file-20200130-41495-16dmxfk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=158&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/312974/original/file-20200130-41495-16dmxfk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=199&fit=crop&dpr=1 754w, https://images.theconversation.com/files/312974/original/file-20200130-41495-16dmxfk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=199&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/312974/original/file-20200130-41495-16dmxfk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=199&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"><a class="source" href="https://www.rba.gov.au/statistics/cash-rate/">Source: RBA</a></span>
</figcaption>
</figure>
<hr>
<p>One with little to back it up was included in the minutes of the November meeting.</p>
<p>It said members “recognised the negative effects of lower interest rates on savers and confidence.”</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/312981/original/file-20200131-41495-15hmoke.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/312981/original/file-20200131-41495-15hmoke.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/312981/original/file-20200131-41495-15hmoke.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=213&fit=crop&dpr=1 600w, https://images.theconversation.com/files/312981/original/file-20200131-41495-15hmoke.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=213&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/312981/original/file-20200131-41495-15hmoke.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=213&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/312981/original/file-20200131-41495-15hmoke.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=268&fit=crop&dpr=1 754w, https://images.theconversation.com/files/312981/original/file-20200131-41495-15hmoke.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=268&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/312981/original/file-20200131-41495-15hmoke.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=268&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"><a class="source" href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2019/2019-11-05.html">Reserve Bank of Australia board minutes, November 2019</a></span>
</figcaption>
</figure>
<p>Similar claims have been made by members of the business community, especially bank executives whose profit margins are threatened by low interest rates.</p>
<p>For example, Westpac chief executive Brian Hartzer told a parliamentary
committee in November that rate cuts were being seen as</p>
<blockquote>
<p>a negative symbol rather than a positive symbol, in that they’re a sign that something’s wrong or that there’s a weakness in the economy</p>
</blockquote>
<p>According to <a href="https://www.afr.com/policy/economy/confidence-jitters-keep-rba-inflation-goal-intact-20191107-p538iu">media reports</a>, concern about the impact of cuts on confidence was a factor in the government’s decision to leave its agreement with the Reserve Bank on targets unchanged rather than strengthening it in order to more aggressively target inflation.</p>
<h2>What’s the evidence?</h2>
<p>The theory would be that even though interest rate cuts <a href="https://www.rba.gov.au/publications/bulletin/2017/sep/1.html">put more money in</a> households’ pockets than they take out, the announcement that a cut is needed might convince householders that conditions are worse than they had thought. </p>
<p>In support of the proposition could be the coincidence that the Westpac-Melbourne Institute Index of Consumer Sentiment dived to a four month low in <a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/economics-research/er20191113BullConsumerSentiment.pdf">October</a> after the Reserve Bank cut, and then improved somewhat in <a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/economics-research/er20191120BullLeadingIndex.pdf">November</a> after it decided not to.</p>
<p>But more systematic study of the index by Melbourne Institute researchers <a href="https://www.sciencedirect.com/science/article/pii/S0304393219300480">Edda Claus and Viet Hoang Nguyen</a>, finds that for the most part consumers respond positively to rate cuts and negatively to rate hikes, responding more to cuts than hikes.</p>
<p>My own research, forthcoming in the <a href="http://www.institutional-economics.com/images/uploads/aereConfidence.pdf">Australian Economic Review</a>, also finds consumers correctly interpret rate hikes as a net negative for the economic outlook and rate cuts as a net positive. The response of businesses is more mixed.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/0-75-is-a-record-low-but-dont-think-for-a-second-the-reserve-bank-has-finished-cutting-the-cash-rate-124499">0.75% is a record low, but don't think for a second the Reserve Bank has finished cutting the cash rate</a>
</strong>
</em>
</p>
<hr>
<p>The Reserve Bank’s <a href="https://www.rba.gov.au/publications/rdp/2001/2001-09/">own</a> research finds that while declines in confidence following rate cuts are understandable given economic conditions are probably deteriorating, the cuts themselves moderate, not amplify the decline.</p>
<p>US studies reach similar conclusions. Research conducted for the <a href="https://www.dallasfed.org/-/media/documents/research/papers/2019/wp1906.pdf">Federal Reserve Bank of Dallas</a> found that a surprise 0.25 points hike in the Federal Funds led to an immediate 1 to 2 points deterioration in the University of Michigan index of consumer sentiment. </p>
<p>The authors of the Dallas Fed study note this means that consumers correctly interpret an increase in US official interest rates as negative for the economy, even if it might also be seen as signalling a stronger economic outlook.</p>
<p>When it comes to rate cuts, even so-called “unconventional monetary policy” of the kind underway in the US and being <a href="https://theconversation.com/now-we-know-the-reserve-bank-has-spelled-out-what-it-will-do-when-rates-approach-zero-127697">considered</a> by Australia’s Reserve Bank, the authors found nothing in their study to suggest they harmed confidence.</p>
<h2>And even if rate cuts did hurt confidence…</h2>
<p>Of course, even if cuts in interest rates and unconventional monetary policy did harm confidence, that wouldn’t be an argument against them. </p>
<p>Were the Reserve Bank to hold off on acting on its assessment of the economy because it was concerned about about damaging confidence, the result would be higher-than-needed interest rates, which would themselves damage the economy. </p>
<p>The bank’s caution would backfire on it and those in the financial sector with a short-sighted focus on lending margins rather than the health of the economy.</p><img src="https://counter.theconversation.com/content/130799/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephen Kirchner is also a senior fellow with the Fraser Institute.</span></em></p>Even when interest rates are already low, on balance further cuts boost rather than harm confidence.Stephen Kirchner, Program Director, Trade and Investment, United States Studies Centre, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/963052018-05-09T11:06:53Z2018-05-09T11:06:53ZYour Spotify history could help predict what’s going on with the economy<figure><img src="https://images.theconversation.com/files/218265/original/file-20180509-4803-n8rhh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/chilling-digital-device-headphone-relaxation-audio-362657822?src=4lBSRy5X4pJ1Y5aAYFGScw-1-37">Shutterstock</a></span></figcaption></figure><p>The Bank of England’s chief economist, Andy Haldane, <a href="https://www.bankofengland.co.uk/speech/2018/andy-haldane-centre-for-data-analytics-for-finance-and-macro">has urged</a> his colleagues to examine the musical mood of the nation when contemplating changes to the bank’s interest rate. How could an increase in <a href="https://www.theguardian.com/business/2018/apr/30/music-downloads-can-gauge-consumer-vibe-bank-of-england">Taylor Swift downloads</a> or a decline in the popularity of rock and roll be relevant for managing the economy? </p>
<p>It all comes down to measuring economic sentiment. This is a way of gauging how people feel about the economy, which behavioural economists use to make predictions about how it will respond to different policies. For example, if people are generally pessimistic about the economy then raising interest rates might encourage them to stop borrowing and spending by so much that it harms the economy.</p>
<p>For some time, researchers have been able to measure economic sentiment by analysing the language used in large numbers of online <a href="http://dx.doi.org/10.2139/ssrn.2504147">news stories</a> and <a href="https://www.sciencedirect.com/science/article/pii/S187775031100007X">Twitter posts</a>. But recently, <a href="https://www.researchgate.net/publication/323560860_The_Rhythm_of_Markets">researchers from Claremont Graduate University</a> have shown that sentiment may be extracted from pop music top-100 lists and music platforms such as Spotify. What’s more, these new sentiment indicators are at least as useful as conventional surveys of consumer confidence.</p>
<p>The idea is that songs have an emotional component that anyone can relate to, encoded in musical attributes such as the songs’ energy, tempo and volume. Online music services such as Spotify already use these kinds of attributes to categorise songs and <a href="https://qz.com/571007/the-magic-that-makes-spotifys-discover-weekly-playlists-so-damn-good/">recommend new music</a> to users based on similar tracks they have already listened to.</p>
<p>You can also understand the emotions expressed by songs from their lyrics, depending on your cultural background. These can be analysed using the same “natural-language processing” software that is used to assess the language of news and Twitter feeds.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">All songs have emotional attributes.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/20-december-2015-istanbul-turkey-spotify-353400926?src=4qqUH46oIfFfHRj1t8B9Ew-1-58">Shutterstock</a></span>
</figcaption>
</figure>
<p>This can be done in a simple fashion, encoding words’ positive or negative emotional loading, or more elaborately by matching words <a href="http://saifmohammad.com/WebPages/NRC-Emotion-Lexicon.htm">to eight core emotions</a>: joy, sadness, anger, fear, disgust, surprise, trust and anticipation. The software then counts up the number of times each emotion is cued within a song’s lyrics.</p>
<p>By identifying the emotional components of the most popular songs, researchers can put together a picture of listeners’ own feelings and use this to predict economic sentiment. Running the emotion mapping exercise on all songs in a top-100 chart captures the lion’s share of new music being purchased and listened to on a month-by-month basis.</p>
<p>This is where the advantages of using “big data” from large numbers of people come to the fore. Survey results only tell you what people who have chosen to participate want you to know. Music charts, on the other hand, reflect actual consumer choices from a much wider group of people.</p>
<h2>Emotional downturn</h2>
<p>The Claremont researchers <a href="https://www.researchgate.net/publication/323560860_The_Rhythm_of_Markets">applied this technique</a> to charts from before and after the 2008 global economic crisis. They found that, after the crash, the frequency of words associated with anger and disgust increased while the frequency of words associated with trust decreased. This type of evidence strongly suggests that music consumers’ states of mind do have a bearing on what music they choose to pay for and listen to.</p>
<p>This research and Andy Haldane’s comments suggest that both the music and lyrics of popular songs can indeed be used to predict economic sentiment, and even short-term stock market movements. Streaming services such as Spotify and Apple Music are sitting on data that could help build a far more detailed map of economic sentiment than top-100 lists. Because these companies have data on individual households, we could even create sentiment indexes for different regions and groups of people (for example, based on how much they earn).</p>
<p>Calling for economists to consult the musical mood of the nation may seem somewhat surprising, bizarre even. But research suggests that the big data approach to tracking consumer sentiment really could be useful. It is just one aspect of the Bank of England’s general drive to broaden and diversify the sources of information it consults in its analyses and decision making. And that should be welcomed.</p><img src="https://counter.theconversation.com/content/96305/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The emotions associated with trends in popular music and lyrics can predict economic sentiment.Kim Kaivanto, Lecturer in Economics, Lancaster UniversityPeng Zhang, Lecturer in Economics and Finance, Guizhou Minzu UniversityLicensed 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>
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<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>
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<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>
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<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>
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<em>
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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>
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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/817012017-07-31T15:40:26Z2017-07-31T15:40:26ZSouth Africa should consider help from the IMF to fix its economy<figure><img src="https://images.theconversation.com/files/180185/original/file-20170728-23805-rg43no.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">shutterstock</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The prognosis that the <a href="https://theconversation.com/south-africas-in-a-recession-heres-what-that-means-78953">South African economy</a> is in dire straits is pretty obvious even to the untrained eye. The solution to the country’s present predicament is also pretty much understood. The International Monetary Fund (IMF) has recently produced a comprehensive <a href="http://www.imf.org/en/Publications/WEO/Issues/2017/07/07/world-economic-outlook-update-july-2017">view</a> which deserves to be considered.</p>
<p>The IMF identifies three key ailments as causes of the country’s <a href="https://theconversation.com/south-africa-can-expect-zero-growth-its-problems-are-largely-homemade-62943">anaemic economic growth</a>. These are low consumer and investor <a href="https://tradingeconomics.com/south-africa/business-confidence">confidence</a> and policy uncertainty. </p>
<p>Continued slow growth should be a matter of grave concern and ought to be treated as an emergency. </p>
<p>Thus far the short and medium term <a href="http://www.imf.org/en/Publications/WEO/Issues/2017/07/07/world-economic-outlook-update-july-2017">outlook</a> suggests that growth outcomes will continue to be pedestrian. What is even more worrying is that over the past four years global economic growth has gained momentum, suggesting that the solution to South Africa’s vanishing growth lies in the country. </p>
<p>The new minister of finance, Malusi Gigaba, recently hinted that South Africa may be compelled to seek <a href="https://www.timeslive.co.za/sunday-times/business/2017-06-30-gigaba-may-need-to-seek-outside-help-to-get-economy-going/">assistance</a> from the IMF. I think the conditions are right for serious consideration of the proposal even though IMF programmes are not very popular with politicians. </p>
<p>There are a number of reasons for this. Requests for IMF assistance suggest that those who manage the domestic economy have failed. The fund’s programmes also come with clearly defined milestones, often described as “conditionalities”. But in most instances, these are well-intentioned and aimed at success. </p>
<p>It’s better to enter an IMF programme early before the situation becomes frantic. As medical doctors might argue, it is easier to deal with an ailment in the earlier stages before it reaches an advanced stage.</p>
<h2>Desperate situation</h2>
<p>The alternative to asking for help now would be continued poor growth outcomes which would have serious social and economic costs. </p>
<p>The country’s poor economic growth record spawned a number of problems. </p>
<p>A shrinking economy means tax revenue shortfalls. The fiscal policy response would be higher taxes or bigger budget deficits.</p>
<p>And then again, interest payments, the fastest growing government expenditure item, would grow even faster. Already, about 11 cents out of every rand goes into <a href="http://www.treasury.gov.za/documents/national%20budget/2017/review/FullBR.pdf">servicing public debt</a>.</p>
<p>As the economy shrinks, more and more income would have to be spent on interest payments. Government’s ability to provide a social safety net in the form of social grants and other services, like education and health care, would be much more constrained. The service delivery <a href="http://ewn.co.za/2017/05/19/opinion-protesters-echo-global-cry-democracy-isn-t-making-lives-better">protests</a> that have become increasingly the norm would become even more widespread as the fiscus comes under serious strain. </p>
<p>Ultimately, the brigade of the unemployed would bear the brunt. Of course, the employed would also suffer because slow growth affects incomes.</p>
<p>Low and anaemic growth dries out consumer confidence. Job losses and subdued growth in incomes as a result of poor growth outcomes and prospects chips away at consumer confidence. </p>
<p>South Africa’s growth performance post 2008 has been very low. Over the past 10 years, the economy recorded an average of <a href="http://data.worldbank.org/country/south-africa">2% growth per year</a>. If this continues it will take more than 30 years to double average incomes in South Africa. </p>
<p>But if the country can increase growth to 5% as projected by the <a href="http://www.gov.za/ISSUES/NATIONAL-DEVELOPMENT-PLAN-2030">National Development Plan</a>, it would take only 14 years to double average income. The higher the growth rate the shorter the time required to double incomes and bring people out of poverty. </p>
<h2>Investor confidence deficit</h2>
<p>The investor confidence deficit is largely as a result of ever increasing political risk, policy uncertainty and <a href="https://theconversation.com/south-africas-jacob-zuma-is-fast-running-out-of-political-lives-80009">wrangling</a> in the ruling party and lately revelations of alleged <a href="https://theconversation.com/how-corruption-is-fraying-south-africas-social-and-economic-fabric-80690">looting</a> of public funds by the political elite. </p>
<p>But not everything’s broken. The performance of the country’s <a href="https://www.brandsouthafrica.com/south-africa-fast-facts/news-facts/wef_global_competitiveness">monetary authorities</a> in the management of monetary policy is admirable. </p>
<p>Where there appear to be lapses is the asset and liability management of the National Treasury. And here, the <a href="https://theconversation.com/corrupt-state-owned-enterprises-lie-at-the-heart-of-south-africas-economic-woes-79135">massive losses</a> of state owned enterprises readily come to the fore. </p>
<p>This is a blot on the canvas of fiscal policy management. And the much touted structural reforms that are required haven’t been forthcoming because the government lacks the capacity to formulate and implement the appropriate policies. In fact, even if it designed the correct ones, the investor community has little faith in its ability to carry them through. </p>
<p>Hence, the need for an IMF programme. </p>
<h2>The IMF has the solution</h2>
<p>An arrangement would achieve a number of objectives.</p>
<p>Firstly, the fund could help the country formulate policies that would unblock the problems that continue to inhibit economic growth and job creation. The mere adoption of an IMF programme would help address the question of policy uncertainty. </p>
<p>Secondly, the IMF is well placed to provide foreign exchange loans, bringing stability in the rand foreign exchange rate market. This in turn would improve investor confidence, leading to more investment in the country. Economic growth would pick up and there’d be an improvement in consumer confidence. </p>
<p>An IMF programme would send a clear and unassailable signal to investors that the country was committed to pursuing a given set of policy options. And it would make the commitment appear credible.</p><img src="https://counter.theconversation.com/content/81701/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Matthew Kofi Ocran receives funding from the NRF. He is also affiliated with Nelson Mandela University as a Research Associate.</span></em></p>The International Monetary Fund’s view of how to fix South Africa’s economy deserves to be seriously considered.Matthew Kofi Ocran, Professor of Economics, University of the Western CapeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/789322017-06-08T19:26:52Z2017-06-08T19:26:52ZVital Signs: what does Treasurer Morrison mean when he says we’re ‘growing into the growth’?<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: Australia’s economic growth is unsurprisingly paltry, the RBA leaves the cash rate on hold, and Australians continue to eat away at their savings.</em></p>
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<p>The two major pieces of economic news in Australia these week were aggressively unsurprising. The RBA left the cash rate unchanged at 1.50%, and first-quarter GDP growth came in at 0.3%, leaving the annual rate at a paltry 1.7%.</p>
<p>Household consumption was the one seemingly bright spot in the GDP picture, contributing fully 0.3 percentage points of that 0.3% quarterly GDP growth figure.</p>
<p>But recall that <a href="https://theconversation.com/vital-signs-dismal-wages-growth-makes-a-joke-of-budget-forecasts-77870">wages growth has been extremely sluggish</a>, and this has been going on for some time, as the following chart shows.</p>
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<p>So, wages growth is low, but household consumption isn’t flat-lining. Doesn’t something have to give? Yes it does. You can’t save what you don’t have, so the inescapable implication is that household savings must be under pressure.</p>
<p>Indeed they are. All of this led to the household savings rate falling to 4.7% in the March quarter. The following chart shows household savings over the last five years.</p>
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<p>There are reasons to be concerned about a low savings rate in the long run in terms of what it means for investment in the economy. But the short-run concern is even more pressing. </p>
<p>We <a href="https://theconversation.com/vital-signs-have-we-finally-reached-peak-house-prices-78519">already know</a>, thanks to the <a href="https://www.rba.gov.au/publications/fsr/2017/apr/household-business-finances.html">Reserve Bank</a>, that one-third of households with a home loan don’t have a one-month repayment buffer on that loan.</p>
<p>The low savings rate means household balance sheets are coming under even more pressure. Australian households, already very highly leveraged (see chart), are not deleveraging.</p>
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<p>To summarise: GDP growth is the lowest since the financial crisis, what growth there is comes from household consumption, but that consumption is preventing households protecting themselves against a negative shock.</p>
<p>To make matters worse, those low GDP figures may very well be the source of the negative shock that households are rather ill-prepared to deal with.</p>
<p>If there is another quarter or two of growth this low, then it is hard to see business investment not falling – and that would put even more pressure on wages and household incomes.</p>
<p>Meanwhile, the government’s budget assumes all this is going to turn around quickly. Wages growth is forecast to be 3.75% toward the end of the forward-estimates period. </p>
<p>Many commentators, myself included, <a href="https://theconversation.com/budget-2017-bank-populism-will-be-paid-for-by-australians-77318">cast serious doubt on this assumption</a> at the time of the budget. The GDP figures this week don’t help make that assumption look any more plausible.</p>
<p>Treasurer <a href="http://sjm.ministers.treasury.gov.au/transcript/114-2017-2/">Scott Morrison essentially said two things</a> in response to the GDP figures. First he blamed the weather: “Cyclone Debbie will also have a significant bearing on economic activity and commodity prices”. Second he said: “The outlook around the world is improving and that means Australia is well positioned because of the decisions we’ve taken to grow into that growth.”</p>
<p>Setting aside the fact that I have no idea what “grow into that growth” means, it is worth remembering that conditions around the world have been pretty terrible on the whole. It wasn’t all that long ago we were talking about Europe falling into a prolonged recession and a large country like Spain possibly defaulting on its sovereign debt.</p>
<p>Yes, things have gotten better, but they’re still bad. In fact, advanced economies around the world have many of the same issues Australia has: low GDP growth, stagnant wages, and concerns about household financial stability.</p>
<p>This week’s figures show Australia has had an exceptionally long run of economic growth without a recession. But it would be a mistake to get wrapped up in a narrative of Australian economic exceptionalism. We face many of the same challenges that other G20 countries do. We also have a <a href="https://theconversation.com/budget-2017-government-still-tinkering-with-housing-affordability-77316">housing affordability crisis</a> in our two largest cities (and a severe problem in most others), and we have a federal budget that seems almost certain to remain in the red for an extended period.</p>
<p>If all that depressing news gets you down, don’t worry too much. Just sit back, relax, and grow into the growth.</p><img src="https://counter.theconversation.com/content/78932/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>Treasurer Scott Morrison says Australia will “grow into growth”. Global economic conditions suggest otherwise.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/619642016-07-03T05:37:05Z2016-07-03T05:37:05ZAn uncertain election result may lead to stagnant financial markets<p>For the second time in the space of ten days, it appears that betting markets and pollsters have got it wrong. First, despite <a href="http://www.bloomberg.com/news/articles/2016-07-01/how-brexit-caught-investors-and-oddsmakers-off-guard">odds showing a 90% likelihood</a> of “Remain” winning, the UK voted to “Leave” the European Union in its June 23 referendum. </p>
<p>Now, a mammoth federal election campaign has resulted in political stalemate in Australia, and the result will not be known <a href="http://www.news.com.au/national/federal-election/2016-federal-election-uncertain-outcome-as-recriminations-begin-to-fly/news-story/fe06e93dc38df56861eb7b6a5e01f180">until Tuesday</a> at the earliest. </p>
<p>Clearly, the repercussions of a hung parliament are not as <a href="https://www.theguardian.com/business/live/2016/jun/24/global-markets-ftse-pound-uk-leave-eu-brexit-live-updates">wide-ranging as “Brexit”</a> and we are unlikely to see Canberra’s streets <a href="http://www.reuters.com/article/us-britain-eu-protests-london-idUSKCN0ZI0FA">flooded with protesters</a>. However, when Australian markets open on Monday they will still be faced with a high degree of <a href="https://theconversation.com/the-market-wants-turnbull-why-close-election-races-increase-volatility-for-investors-59171">political uncertainty</a>. Investors do not tend to react favourably to such ambiguity. </p>
<h2>Investors reduce risk under political uncertainty</h2>
<p>Investors tend to respond in one of two ways. The <a href="http://onlinelibrary.wiley.com/doi/10.1111/acfi.12107/abstract">most-common situation</a> is for the political uncertainty to manifest in higher levels of market volatility and a flight to quality as investors try to reduce their exposure to risk. </p>
<p>This was what we witnessed post-Brexit: Australian stockmarkets and the dollar fell by more than 3%, while “safe” government bond <a href="https://au.news.yahoo.com/thewest/a/31913757/aust-bonds-soar-as-brexit-confirmed/">yields hit an all-time low</a>. </p>
<p>An alternative is for markets to become locked in stasis – where investors sit on their hands, unsure as to whether they should buy or sell. Market liquidity falls and asset prices become resistant to change. </p>
<p>This is effectively what happened following the hung parliament of August 2010. In the aftermath of that election, stock prices remained within a tight trading range and the dollar hardly budged over the course of the following week. </p>
<p>When the result of the <a href="http://www.abc.net.au/news/2016-07-03/election-result-what-happens-now/7564250">2016 election</a> is finally known, it appears that the outcome will be either a minority Coalition government or a hung parliament. The Senate is likely to be more fractious than prior to the election. </p>
<p>Talk has already started about potential unrest among the conservative faction of the Liberal Party who supported former prime minister Tony Abbott. There is even discussion of an <a href="http://www.smh.com.au/federal-politics/federal-election-2016/election-2016-arthur-sinodinos-suggests-election-rerun-may-be-needed-given-cliffhanger-result-20160702-gpx8dz.html">election re-run</a> if the parliament proves ungovernable. Clearly, this uncertainty could linger for months.</p>
<h2>Concerns for jobs and growth</h2>
<p>The likelihood of a lengthy period of uncertainty is important. It means it will be <a href="http://www.smh.com.au/federal-politics/federal-election-2016/federal-election-2016-messy-result-may-lead-to-credit-downgrade-weigh-on-shares-economist-20160703-gpxajj.html">difficult to pass any economic or budgetary reforms</a>. Without such reforms, it is unlikely the budget will return to surplus in the near future (if ever) and it becomes more likely that the AAA credit rating will be lost. </p>
<p>This creates multiple concerns for Australian financial markets, and the broader economy. A credit rating downgrade will likely <a href="http://www.smh.com.au/business/big-four-banks-should-fear-a-downgrade-to-australias-credit-rating-20160414-go699i.html">increase the cost of funding</a> for Australia’s banks. </p>
<p>The <a href="https://theconversation.com/au/topics/big-four">Big Four banks</a> will be particularly impacted given the significant role that offshore funding plays in their balance sheet management. This will mean higher interest rates for borrowers – which would not be beneficial for the housing market.</p>
<p>A prolonged period of uncertainty will make it difficult for firms to finalise investment decisions. At a time when the economy is still attempting to transition away from the boom in mining investment this will dent economic growth and employment. So much for “<a href="https://www.liberal.org.au/coalitions-policy-more-jobs-and-growth-through-increased-trade-and-investment">jobs and growth</a>”. </p>
<p>Essentially, this is a recipe for a “<a href="http://www.sciencedirect.com/science/article/pii/S1544612316300228">risk-off</a>” environment of declining stockmarkets and a depreciating Australian dollar. It is also likely that the market will price a <a href="http://www.smh.com.au/business/markets/brexit-not-enough-to-force-july-cash-rate-cut-20160626-gpshgd.html">higher likelihood</a> of a reduction in the RBA target rate at the July or August meeting. This will further aid a continued rally in relatively safe government bonds (bond prices rise as yields fall).</p>
<p>If you consider the ongoing political uncertainty resulting from Brexit and the forthcoming US presidential elections in addition to the federal election, then months of nervous markets may lay ahead.</p><img src="https://counter.theconversation.com/content/61964/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lee Smales 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 prospect of a hung parliament or minority government may lead to investor uncertainty and little movement in asset prices.Lee Smales, Senior Lecturer, Finance, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/603442016-06-02T20:23:09Z2016-06-02T20:23:09ZVital Signs: why everyone seems a bit worse off<figure><img src="https://images.theconversation.com/files/124864/original/image-20160601-1955-n2aks.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Sorry, but the glass is half empty.</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: GDP not as good as it looks, apartments skew building numbers, and US consumers display fake confidence.</em></p>
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<p>At first blush, first quarter GDP figures for Australia, released Wednesday, seemed very positive. Growth for the quarter was 1.1%, pushing the annual rate to 3.1% – up from 2.9% as at December and ahead of market expectations of 2.8%.</p>
<p>On closer inspection the news wasn’t so good. Growth came largely from exports – accounting for fully 1 percentage point of the 1.1% growth. What’s wrong with exports? Well, nothing, except that a quirk of national accounting means that it is volume, not prices, that matter for the GDP figure. And prices of exports fell. A lot.</p>
<p>To get from the 3.1% GDP figure to what really matters for living standards – “net national (disposable) income” one has to deduct three things. First, the terms of trade effect from the export price drop lops 2.5% points off the 3.1%, leaving us at 0.6%. Take out overseas payments, and depreciation, and net national disposable income (NNDI) fell by 1.3%.</p>
<p>Yikes! But that continues a trend since the peak of our terms of trade in 2011. In fact, the rate of contraction of NNDI has been right around the pace seen last quarter. So, if you wonder why everyone seems a bit worse off, why consumers aren’t spending all that much, and why businesses aren’t investing and expanding, this is the heart of the explanation.</p>
<p>If the Australian economy was a university we would be admitting lots more students, but getting much lower fees per student.</p>
<p>Furthermore, the price deflator used to calculate GDP – which is a broader measure of inflation than the consumer price index – was negative for the first time in 16 years. This is further evidence of the <a href="https://theconversation.com/vital-signs-deflation-down-under-58494">nasty deflationary pressures</a> besetting the Australian economy – and will provide the Reserve Bank with further impetus to cut rates again, soon.</p>
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<p>Australian building approvals rose for the fifth consecutive month, up 3%. This was well ahead of market expectations of a fall of a similar magnitude, and put approvals up 0.7% compared to a year ago. That said, the growth was driven by a large 8.7% rise in apartment approvals. That comes from a relatively small number of large projects, leading many market participants to speculate that this “lumpy” investment simply presages declines later in the year.</p>
<p>Meanwhile, there were mixed signals about US consumer confidence. The <a href="https://www.conference-board.org/data/consumerconfidence.cfm">Conference Board Index</a> fell from 94.2 in April to 92.6 in May, but the University of Michigan index rose to an 11-month high of 94.7. The Conference Board Index also showed that more households planned to buy a house or a vehicle in the coming 6 months, but fewer intended to buy a major household appliance.</p>
<p>My take on that is that households expecting an interest rate rise from the Fed think it’s a good time to buy something with a mortgage or significant loan – like a house or a car. A refrigerator, not so much. If that’s a correct reading of the situation then it’s essentially fake confidence that will be reversed if the Fed raises rates in coming months. Which it will.</p>
<p>Mixed signals, too, about Chinese manufacturing. The official Purchasing Managers’ Index (PMI) was 50.1 in May – just above the level of 50 where positive and negative sentiment is exactly balanced. However, the private, but highly regarded, Caixin PMI declined to 49.2 in May, the fifteenth consecutive month signalling a contraction in activity.</p>
<p>This latter fact was missed by most Australian news outlets, who reported the official figure and concluded it was good news. I have somewhat less faith in official Chinese data.</p>
<p>Overall: unclear news from overseas, strong domestic construction growth that might well reverse in coming months, GDP growth that doesn’t translate into income, and more signs of deflationary pressures.</p>
<p>Sorry, but the glass is half empty.</p><img src="https://counter.theconversation.com/content/60344/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>GDP growth that doesn’t translate into income is no cause for celebration.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>
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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>
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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>
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<span class="caption">Figure.</span>
<span class="attribution"><span class="source">ABS, Gillitzer and Kearns (2005)</span></span>
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<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>
</figcaption>
</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>
<hr>
<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/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">
<figcaption>
<span class="caption"></span>
<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>
</figcaption>
</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/354722014-12-15T00:58:15Z2014-12-15T00:58:15ZThe Aussie dollar at US75 cents: good or bad?<p>In an <a href="http://www.abc.net.au/news/2014-12-12/glenn-stevens-talks-down-dollar-slams-politicians/5963060">interview</a> with the Australian Financial Review last week, Reserve Bank Governor Glenn Stevens suggested the Australian dollar might fall to US75 cents in 2015. And he intimated that it wouldn’t be a bad thing.</p>
<p>A lower exchange rate makes our exports cheaper for the foreigners who buy them, and that increases their demand for our exports. Good news for natural resource exporters (iron ore and coal are our top two exports) and even universities: education is Australia’s third largest export, at more than A$15 billion in 2013. Because labour is paid in Australian dollars, an exchange rate-depreciation should increase revenues, but not costs per unit of output — so profit goes up.</p>
<p>It is this effect that people — Stevens included — typically highlight as a positive of a lower exchange rate in a small open economy such as Australia.</p>
<p>What is all too often forgotten — or at least glossed over — is the impact on imports. An exchange rate depreciation makes them more expensive.</p>
<p>Stevens is, of course, well aware of this, pointing out in his interview with the AFR that we would all be having more holidays at home as a result. He added:</p>
<blockquote>
<p>“The price of petrol at the pump, which is falling at the moment, in Australia won’t fall quite as much as it might in America…for most of us the most direct impact is our purchasing power over foreign goodies is not as high as it was.”</p>
</blockquote>
<p>“Foreign goodies”? Goodbye Aspen, hello Thredbo. No big deal?</p>
<p>Actually, it may be a much bigger deal than Stevens seems to think.</p>
<h2>The real impact</h2>
<p>No, the Aspen ski trip-effect is not the issue. It’s the fact that we import a lot of high cost consumer durables and business inputs. When the price of durables, like flat-screen televisions and computers goes up, and there are no close domestic substitutes, people delay their purchases. This makes consumers worse off than they would have been, but it also imposes a big hit on the retail sector.</p>
<p>This might all seem like esoteric stuff: so you get a fridge with an internet connection a few years later than you otherwise would. But consumer confidence is incredibly important precisely because of the negative feedback loop that ensues when it falls. That is why Joe Hockey is constantly at pains to emphasise that Australian consumers should be confident. Even Stevens highlights the importance of consumer confidence on a regular basis.</p>
<p>The impact on business inputs is also important. A rise in the cost of inputs is a direct hit on the competitiveness of our exporters. And when the final goods are sold domestically the input price hit eventually translates into higher prices, also hurting consumers.</p>
<p>But the most interesting part of the Stevens interview was his discussion of interest rate cuts in the context of the value of the Australian dollar. He said: </p>
<blockquote>
<p>“I don’t want to say that there are no circumstances in which we would consider further changes in the interest rate. I think that has to remain an open question. But I think it’s good that the exchange rate looks like it’s doing more of a normal role. But that’s to be welcomed, I think.”</p>
</blockquote>
<p>Surprisingly direct for a central banker. My translation: “If the Australian dollar remained high I was going to cut the cash rate to push it lower, but looks like it’s going to 75 by itself, so not rate cuts any time soon.” </p>
<p>The markets seemed to think so. The probability of a rate cut in February fell from 40% to 16% after the interview. The chances in March fell from 70% to 50%.</p>
<p>And therein lies the rub. Mr Stevens is plainly trying to manage many different things: inflation, economic growth, housing prices, and the Australian dollar. And he’s only got one tool at his disposal: the cash rate. </p>
<p>Given low inflationary pressures because of constrained wage growth, a housing market that seems to be cooling, and economic growth still under threat, a rate cut (or two) seemed plausible. With Stevens’s desire to see a lower dollar —something a rate cut encourages — cuts seemed highly likely. But with the dollar falling because of the plunging iron ore price, maybe not so much.</p>
<p>Conventional wisdom is that a lower Aussie dollar is good news for exporters. It is. But it’s bad news for consumers and business that source inputs from abroad. And, it seems, it’s bad news for home owners and businesses that borrow. Because Stevens seems much less likely to cut rates in the face of a falling dollar.</p><img src="https://counter.theconversation.com/content/35472/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>In an interview with the Australian Financial Review last week, Reserve Bank Governor Glenn Stevens suggested the Australian dollar might fall to US75 cents in 2015. And he intimated that it wouldn’t be…Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/349612014-12-04T19:33:34Z2014-12-04T19:33:34ZSorry Joe, consumer spending will disappoint Santa this Christmas<figure><img src="https://images.theconversation.com/files/66193/original/image-20141203-3636-q21lqr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Christmas is unlikely to come early this year for retailers as consumers bunker down and pay off household debt.</span> <span class="attribution"><span class="source">Dan Himbrechts/AAP</span></span></figcaption></figure><p>Treasurer Joe Hockey <a href="http://www.theaustralian.com.au/national-affairs/politics-news/joe-hockey-pleads-with-consumers-not-to-let-santa-down/story-fn59nqld-1227141876441">called on shoppers</a> this week to “not let Santa down” and asked them to spend up big at the stores this Christmas. Unfortunately, the latest retail and consumer confidence data indicate his calls are falling on deaf ears.</p>
<p>Westpac’s <a href="http://www.westpac.com.au/about-westpac/media/reports/australian-economic-reports/">Consumer Confidence Index</a> shows pessimists outnumber optimists. This has been the case for the last nine months. The index was up 1.9% in November, but still well below its level a year ago.</p>
<p>The last time consumer sentiment was in negative territory prior to Christmas was 2011. Shoppers are more focused on saving and continuing to pay down debt while interest rates remain low.</p>
<p>The latest Westpac/Melbourne Institute survey also recorded <a href="http://www.theaustralian.com.au/business/economics/consumer-sentiment-still-in-doldrums/story-e6frg926-1227120284756">nine consecutive months</a> of net negative consumer sentiment. </p>
<p>While Hockey disputed the findings of this survey and instead referred to credit reporting firm Dun and Bradstreet as the “authoritative data on consumer confidence”, it would appear he wasn’t comparing apples with apples. The Westpac-Melbourne Institute Consumer Sentiment Survey reports consumer confidence and Dun and Bradstreet surveys <a href="http://dnb.com.au/Header/News/Business_Expectations_Survey_Sentiment_outstrips_results/indexdl_11088.aspx">business sentiment</a>. While the two surveys are inevitably entwined, each measures different points of view. </p>
<p>Yet even the Dun and Bradstreet survey released this week points to a potentially difficult time for Australian businesses this Christmas. The report highlights businesses are failing to meet their own projected earnings due to slower economic growth. The number of businesses reporting an increase in sales fell from 43% to 38% in the third quarter. The number of businesses reporting reduced sales was also 11% higher than expected. </p>
<h2>Why is spending and consumer confidence important?</h2>
<p>Consumer confidence indicates the optimism shoppers feel about the overall state of the economy and importantly their personal finances. If consumers are confident, they are more likely to spend on household items, buy a new car, even upgrade to a new home. In contrast, if confidence is lower, shoppers will save more, pay down debt and spend less. </p>
<p>In principle, Hockey’s request to spend up big this Christmas makes sense. Manufacturers, banks and governments use consumer confidence indices for planning purposes.</p>
<p>Manufacturers and retailers who anticipate shoppers will spend more will increase their inventories, put on more staff and invest in new projects. Banks will prepare for increased lending activities and credit card use. Builders will plan for a rise in home construction and put on apprentices. Hockey is also hoping for improved tax revenues based on this increased spending. </p>
<p>All of the pleas to spend more assume shoppers will spend here and not via online overseas retailers. If they choose the latter option there will be no net benefit to the Australian economy. The <a href="http://business.nab.com.au/online-retail-sales-index-in-depth-report-october-2014-8955/">NAB Online Retail Sales Index</a> released this week shows online spending grew by 12% over the past year. However, out of the $16 billion Australian shoppers spent online during this period, over three-quarters of purchases were actually from Australian retailers. </p>
<h2>Are Australians likely to take Hockey’s advice and spend?</h2>
<p>The Westpac-Melbourne Institute Consumer Sentiment Survey asks shoppers to indicate their projected Christmas spending each November. Alarmingly, <a href="http://www.smh.com.au/business/the-economy/consumer-pessimism-heralds-disturbing-christmas-sales-westpac-survey-shows-20141112-11ktug.html">38% of shoppers</a> say they plan to spend less on gifts this Christmas. </p>
<p>This should have alarm bells ringing in retail corporate head offices everywhere. The results also indicate that 50% of shoppers will spend about the same as last year, and only 12% plan to spend more. So where might they be shopping this Christmas? </p>
<h2>Retail winners and losers this Christmas</h2>
<p>According to the <a href="http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/8501.0Main%20Features3Sep%202014?opendocument&tabname=Summary&prodno=8501.0&issue=Sep%202014&num=&view=">Australian Bureau of Statistics</a>, there will be a split retail market of winners and losers this Christmas.</p>
<p>Australians are buying more alcohol and are eating out more. So cafes, restaurants, fast-food operators and liquor stores will again be big winners this festive season. </p>
<p>Supermarkets remain reasonably strong <a href="http://www.news.com.au/national/nielsen-research-shows-supermarket-prices-are-down-but-our-grocery-bills-are-up/story-fncynjr2-1226810733558">despite strong price discounting and a deflationary market</a>. Price discounting on key lines this festive period is likely to continue as the supermarkets battle for market share. <a href="http://www.news.com.au/finance/business/coles-flybuys-program-lures-online-shopping-giants-including-ebay-and-apple/story-fnkgdftz-1227138750739">Loyalty programs</a> will also be changed and relaunched to capture more shopping data this season.</p>
<p>Discretionary spending remains tight and clothing stores are unlikely to see an increase in sales. Newsagencies and book stores are feeling the heat from online channels and downloads. There may be an eReader under the Christmas tree this year but probably not a book or magazine subscription. United Kingdom retailer WH Smith may, however, breathe some life into the sector as the company <a href="http://www.opi.net/news/wh-smith-to-acquire-supanews">increases its local presence</a>. </p>
<p>Australians are also spending more on hardware and gardening. Bunnings and Masters will do well, as will consumer electronic goods retailers like Harvey Norman and JB Hi-Fi. However, the Myer and David Jones department stores will struggle as a majority of their sales are tied to footwear and clothing. Shoppers should expect to see the big post-Christmas sales event pulled forward and more discounting throughout December. </p>
<p>While retailers around Australian will applaud Hockey’s pleas for shoppers to spend up big this Christmas, most consumers still appear cautious about handing over their credit cards this season.</p><img src="https://counter.theconversation.com/content/34961/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gary Mortimer 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>Treasurer Joe Hockey called on shoppers this week to “not let Santa down” and asked them to spend up big at the stores this Christmas. Unfortunately, the latest retail and consumer confidence data indicate…Gary Mortimer, Senior Lecturer, QUT Business School, Queensland University of TechnologyLicensed 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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<span class="caption">Aggregate August.</span>
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<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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<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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</figure>
<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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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55626/original/bsc3pqb3-1407120511.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55626/original/bsc3pqb3-1407120511.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55626/original/bsc3pqb3-1407120511.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55626/original/bsc3pqb3-1407120511.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55626/original/bsc3pqb3-1407120511.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55626/original/bsc3pqb3-1407120511.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55626/original/bsc3pqb3-1407120511.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55626/original/bsc3pqb3-1407120511.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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<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/254722014-04-10T02:00:31Z2014-04-10T02:00:31ZWho is the South African retail giant behind the David Jones bid?<p>Yesterday morning came the news <a href="http://www.abc.net.au/news/2014-04-09/david-jones-board-recommends-takeover-bid-from-south-african-wo/5377126?section=business">South African retailer Woolworths had offered $4 a share to acquire David Jones</a>, a proposal that has the approval of the department store’s board. This offer, worth an estimated A$2.15 billion, represents a 25% premium over the current share price value. An earlier offer, <a href="http://www.theage.com.au/national/myer-still-keen-on-merger-with-david-jones-20140220-3348n.html">from rival Myer</a>, was rejected earlier this year.</p>
<p>But who is Woolworths? Not to be confused with Australia’s largest supermarket, Woolworths SA is one of South Africa’s largest retailers.</p>
<h2>No ordinary grocer</h2>
<p>Woolworths SA has been one of the biggest South African retailers since the early 1930s, primarily targeting middle-class and wealthy consumers. The company’s first foray into department stores came after World War 2, when it established strategic links with British retailer Marks & Spencer and modelled their stores on the British retailer’s layout and design. Although a close relationship still exists between them, neither has vested financial interests in the other today.</p>
<p>Woolworths SA operates a number of different retail offerings – from full-line homeware stores to food and groceries – in South Africa, neighbouring countries, as well as in Australia and New Zealand. from full-line homeware stores to food and groceries.</p>
<p>The chain currently offers only a small range of products through its recently launched online platform. But it has moved into a number of different online spaces quickly. Woolworths <a href="http://retailjobsafrica.com/woolworths-first-south-african-retail-group-to-offer-facebook-shopping">partnered with one of South Africa’s largest marketing agencies Quirk</a>, for instance, to develop a f-commerce (Facebook-commerce) platform, <a href="http://www.woolworthsholdings.co.za/investor/annual_reports/ar2011/integrated/business/industry_trends.asp">targeting South Africa’s fast growing younger tech-savvy consumer</a>.</p>
<p>In all, Woolworths SA operates 150 corporate-owned stores and nearly 70 franchises in South Africa. It also has over 50 international franchises in other African nations and the Middle East.</p>
<p>Woolworths is not foreign to Australia either, owning nearly 90% of retail chains Country Road, Witchery and Trenery since 1998.</p>
<p>Nor is Woolworths CEO Ian Moir a stranger to Australia’s sometimes colourful world of business identities, being <a href="http://www.smh.com.au/business/woolworths-chief-ian-moir-is-veteran-of-country-road-spat-with-solomon-lew-20140409-36dg5.html">involved in a spat with businessman Solomon Lew over Country Road for nearly two decades</a>. Lew is Country Road’s second largest shareholder through his company Australian Retail Investments, which lost a bidding war with Woolworths for control of the retailer. </p>
<h2>A strong suitor</h2>
<p>The arrival in South Africa of global powerhouses like Zara, Topshop and soon H&M, (which also launched in Australia this week) has forced Woolworths to innovate. Since then, it has been working on a procurement strategy to shorten lead times, and claims it can now get more than 30% of its own range to the market in just five to seven weeks, where previously it took more than 11 months.</p>
<p>Its financial reports suggest the company has significant cash resources, a strong retail strategy and is looking to expand. In February, the retailer announced an aggressive three-year plan to <a href="http://www.bdlive.co.za/business/retail/2014/02/17/woolworths-to-open-fashion-brand-stores-across-sa">roll out Country Road, Witchery and Mimco stores into South Africa</a>.</p>
<p>Overall half-year sales across the global group increased 16.2% for 2013, compared to 8% growth in clothing sales for comparable stores.</p>
<p>The group’s Australian subsidiary Country Road performed extremely well with net profit increasing 72% to $37.95 million for the six months to December 28, <a href="http://www.theaustralian.com.au/business/companies/record-halfyear-profit-for-country-road/story-fn91v9q3-1226816653860">up from $22.1 million for the same period in 2012</a>.</p>
<h2>A happy pairing?</h2>
<p>If the takeover is successful, David Jones will have access not only to cash, but international retail management expertise, which will allow it to improve its online offering, refurbish stores, improve its range and secure exclusive international brands.</p>
<p>The acquisition of David Jones will mean Woolworths can reach a sufficient scale to compete effectively with other large global retailers. The <a href="http://www.woolworthsholdings.co.za/whl_mini_2014/pdf/transaction_announcement_final.pdf">announcement</a> referred to “efficiencies and economies of scale that will over time deliver a material improvement in profitability” as the rationale for the takeover.</p>
<p>A reinvigorated David Jones, clearly positioned as a high-end, full-service department store will capture a bigger slice of discerning shoppers’ dollar. Already, international fashion retailers – Hermes, Louis Vuitton and Hugo Boss, for instance – are entering or expanding in the Australian market, so it is evident that opportunities exist in this segment. </p>
<p>The takeover comes during a period of rapid expansion for Woolworths, as it reorientates business away from some emerging African countries – <a href="http://www.iol.co.za/business/companies/woolworths-quits-nigeria-1.1603256">late last year it withdrew from Nigeria</a> – and as it focuses on <a href="http://www.woolworthsholdings.co.za/media/news_display.asp?Id2=618">internationalising its existing brands</a>.</p>
<p>The challenge for rival Myer is that it is currently “stuck in the middle” with no clear position.</p>
<h2>Considerable risks</h2>
<p>But high-end department stores in Australia are not in the same strong market position as department stores in South Africa. Wealth in South Africa has become more highly concentrated in the hands of the rich since the transition to democracy began in 1993. Between 1993 and 2008, the middle class grew 26% while the wealthiest <a href="http://www.bdlive.co.za/national/2013/07/29/sas-upper-class-more-african--and-ever-wealthier">trebled in size and grew from 0.4% of the population to 1.3%</a>.</p>
<p>With South Africa’s population more than double that of Australia, Woolworths SA has continued to grow, while <a href="http://www.theafricareport.com/Southern-Africa/the-future-of-south-africas-rising-middle-class.html">meeting the needs of an emerging middle and upper class</a>. </p>
<p>In Australia, the high-end shopper segment is relatively small and predominantly located in cities like Melbourne, Sydney, Brisbane and growing in Perth.</p>
<p>And Australian shoppers continue to be cautious. Westpac’s Melbourne Institute Index of Consumer Sentiment <a href="http://www.westpac.com.au/docs/pdf/aw/economics-research/er20140212BullConsumerSentiment.pdf">suggests the shine may have come off retail spending</a> already as households start to worry about the future. Specifically, the component of the Index measuring consumers’ expectations for the economy over the next 12 months is at its lowest level since March 2012.</p>
<p>Woolworths SA may be biting off more than it can chew.</p><img src="https://counter.theconversation.com/content/25472/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gary Mortimer 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>Yesterday morning came the news South African retailer Woolworths had offered $4 a share to acquire David Jones, a proposal that has the approval of the department store’s board. This offer, worth an estimated…Gary Mortimer, Senior Lecturer, QUT Business School, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/48642011-12-22T19:35:23Z2011-12-22T19:35:23ZRetailers aren’t feeling the festive cheer, but who’s to blame?<figure><img src="https://images.theconversation.com/files/6763/original/5q4mh8rp-1324516554.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Christmas retail performance hasn't been pretty this year.</span> </figcaption></figure><p>The lead up to Christmas inevitably draws our attention to the actions and performance of retailers. This December there have been very few tales of cheer. </p>
<p>Major players such as JB Hi Fi, Billabong and Kathmandu have issued “warnings” of lower than expected sales and declining margins. Spending looks to be down across the sector (other than for groceries), and pre-Christmas “sale” signs are already appearing – a trend that kicked in a couple of summers ago during the height of the global financial crisis. </p>
<p>There is much talk that the traditional Boxing Day sales will involve very “deep” discounting. So where has it gone wrong for the nation’s shopkeepers? Is there any light on the horizon?</p>
<p>2011 has been a terrible year for the sector. Retailers have been caught in a perfect storm. </p>
<p>On the demand side, high levels of consumer uncertainty have seen shoppers reluctant to open their wallets. In the wake of the GFC, Aussies are finally saving, and credit card debt is on the decline. </p>
<p>There appears to have been a “mindset shift” among shoppers, with greater pursuit of the bargain and more comparison shopping (including online). Excess global production of many goods has had a deflationary effect, further fuelling the bargain mentality. The weather hasn’t been helpful either, with two wet summers doing little to encourage shopping. </p>
<p>Meanwhile, new competitors have emerged for this stagnant sales dollar: in both the “bricks” and the “clicks” domains. Prominent international retailers, particularly in the fashion clothing markets, are finally making serious entrées into Australia. The arrival of The Gap, Zara and Top Shop, and impending openings by Uniqlo and H&M, have highlighted the poor offerings of many staid, tired local brands (and also the copycat merchandising of several). </p>
<p>The rise of the Australian dollar, has seen many more Australians braving international online purchases, exposing the low price competitiveness of a wide variety of products on Australian shelves. </p>
<p>It does look like e-commerce has finally tipped over into the mainstream (it is worth remembering that Amazon is now 16 years old). The behemoths of Aussie discretionary retail – David Jones, Myer, Harvey Norman – can no longer continue to naysay, or lobby for ineffective GST impositions. All three firms launched their web portals quite successfully in 2011. Their online success points to one possible path for revitalisation.</p>
<p>Mixing “bricks” and “clicks” should be the focus for Australian retailers large and small. Retailers with extensive store networks do have advantages in terms of showcasing physical goods, delivering online purchases and offering collection points. </p>
<p>Replicating the shopping environment online extends the reach and the opening hours of such store networks. Highly specialised (and localised) retailers who also offer their wares online have the scope to broaden their appeal, overcome geographical constraints, and potentially improve their own buying power with suppliers. </p>
<p>Highly skilled merchandisers could leverage their “curating” capabilities in the e-commerce arena, especially through the utilisation of social media. </p>
<p>Operating online presents many new challenges, and some retailers won’t be up for these. Business-to-consumer delivery logistics are complex, and the service processes very different. Specialist providers of such infrastructure are emerging – including Australia Post – and smart entrepreneurs will no doubt continue to find innovative solutions and niches. </p>
<p>It is worth remembering that not every shopper, nor every purchase, will head online. Some consumers lack access. Some products are too experiential in nature. </p>
<p>Physically shopping can be a highly enjoyable and social leisure activity that bombards all the senses. Shopkeepers who entice and stimulate and bring together products and shoppers in an exciting fashion can and do still earn a living. Perhaps their Christmas tales would make for rosier headlines? </p><img src="https://counter.theconversation.com/content/4864/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andre Sammartino 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 lead up to Christmas inevitably draws our attention to the actions and performance of retailers. This December there have been very few tales of cheer. Major players such as JB Hi Fi, Billabong and…Andre Sammartino, Senior Lecturer in International Business & Strategic Management, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/23432011-07-14T06:40:33Z2011-07-14T06:40:33ZAre doubts about consumer confidence justified?<figure><img src="https://images.theconversation.com/files/2305/original/gale.jpg?ixlib=rb-1.1.0&rect=203%2C203%2C3927%2C2485&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">In the frame: David Jones has fallen victim of slumping consumer confidence - but is it warranted?</span> </figcaption></figure><p>Consumer confidence has fallen by 8.3% to its lowest level in two years, according to the Westpac-Melbourne Institute Consumer Sentiment Index. </p>
<p>The drop has been connected to speculation about the impact of the carbon tax, with Treasurer Wayne Swan calling on Opposition Leader Tony Abbott to “stop scaring the consumers”.</p>
<p>Retailer David Jones last night issued a <a href="http://www.asx.com.au/asxpdf/20110713/pdf/41zrklj4ccn4tl.pdf">dramatic profit downgrade</a>, saying it expects second-half profits to be down by 9% to 12%. The company blamed the slowdown of sales on factors such as offshore Internet retailers due to the high Australian dollar, fears about the carbon tax and the impact of the flood levy. </p>
<p>People were tending to save more and spend less while international uncertainty and threats of further interest rate rises was also fuelling poor consumer confidence, the company said.</p>
<p>But in the midst of a continuing boom, should Australians be so pessimistic about the current conditions? And exactly how are these perceptions shaped?</p>
<p>We asked Deakin University lecturer and consumer behaviour expert, Paul Harrison. </p>
<h2>Is Swan right to claim consumer confidence has suffered due to Abbott’s campaign of “scaring the consumers”?</h2>
<p>Probably the key issue to address here is how we interpret the information provided to us through something like a consumer confidence index. The reality is that we look at these metrics and assume they are absolute measures of a particular consumer response. </p>
<p>What is important to understand is that the measure is a result of consumers trying to interpret the range of information that is constantly being provided to them through their information sources, including the media, but also their friends and other social groups.</p>
<p>Any sort of confidence index is obviously subjective, but the problem is that in most cases it is presented as an objective measure, particularly when it is delivered by a politician or an economist. </p>
<p>If we are receptive to the message, and we are being constantly told the sky is going to fall, many people look for evidence to support it, which increases the likelihood that they are going to believe that the sky is going to fall. </p>
<p>Our biases influence our willingness to believe in the information being provided. So, that’s where you see the idea of consumer confidence. We don’t have the capacity to separate the rational elements from the emotional elements. </p>
<p>It’s no surprise people are less confident because we are constantly being told to be less confident. It’s not an absolute thing, but it is pervasive and powerful.</p>
<h2>So it’s a reality/perception thing?</h2>
<p>At an individual level, perception is reality. </p>
<p>When it comes to indexes and surveys, there is an expectation that we should have an opinion about most things, when in fact we tend to be too busy to have strong opinions until somebody tells us that we need to have one. </p>
<p>So, when people are surveyed, or asked to have an opinion, there is a tendency to draw upon the information most readily accessible in their memory. It’s about recall more than anything. If you look at the way that people like you are responding to a particular issue, then this makes it easier for you to form an opinion. It is not a reflection of a rational reality. It is an emotional response.. </p>
<p>Looking at the way that news is reported, there is not a lot to feel confident about, most of the time. The role of news is to report the extraordinary, rather than the ordinary. So, news and the continuous news cycle, requires emotional stories, rather than rational stories. </p>
<p>If you take the emotion out of the discourse - in reality, Australia is in a really good place in comparison to the rest of the world; Europe, Asia, even the US. So, it comes back to the “risk of feelings” thesis – that our opinion is determined by our immediate emotional perception of risk today, to me, rather than any rational response to a situation.</p>
<p>That emotional response then has a flow-on response. </p>
<h2>David Jones announced a profit downgrade off the back of low consumer-confidence levels. If people are fearful, they stop spending, don’t they?</h2>
<p>Kind of. The consumer confidence index will add support to the attitudes of consumers who think that they should stop spending. And, as a quantitative measure, it provides an indication of confidence, which may lead to reduced spending. But there are other factors at play here. </p>
<p>I think if you stratified the data, you would actually see there are different types of people in different situations who would have a very different perspective. </p>
<p>Because we’re just looking at averages, basically you’re getting a broad perspective and that’s useful; but what you’re not getting is where is the confidence and where is the lack of confidence amongst the market. </p>
<h2>So is it risky to use consumer confidence as a barometer to the health of the economy?</h2>
<p>I don’t think it’s dangerous if it were being used as a suite of tools, but it becomes risky when it is presented as the index or monitor that everyone refers to and gets the headlines. </p>
<p>There is a tendency amongst politicians to exploit lay people’s innumeracy, because people are willing to accept a number or statistic that a perceived authority presents, on trust, rather than argue back. When people are confronted by numbers or statistics they are likely to suspend natural scepticism in favour of acceptance of numbers as the final authority. </p>
<p>This is partly due the school curriculum, which tends to teach mathematics by rote, rather than by understanding, that is, the numbers learned are meaningful because their teacher told them that they are meaningful. So, in the case of consumer response, most people (even highly educated people) are likely to assume that firstly, the numbers are accurate, and secondly, the numbers communicate the authority of the person or institute providing them. </p>
<p>In a way it’s the result of our need for absolute values and definitive information. </p>
<p>Most people don’t think about how confident they are about the economy on a day-to -day basis, unless they get asked or have some major reason to be thinking about it. Generally speaking, people get on with their very busy lives. It’s not until a politician ramps up perceptions around it and suggest that things are going to be bad that we think, “well maybe I should have an opinion”.</p>
<p>This constant focus on something as abstract as “the economy” is out of proportion to the way people operate on a day-to-day basis. And yet, our news bulletins are constantly telling us about the S&P500 or the FTSE. Most people in the street wouldn’t even know what a FTSE is, yet this informs our view of how confident we should be.</p>
<h2>So is Tony Abbott’s carbon message more effective than the government’s?</h2>
<p>People are more likely to accept a message if it fits with how they are currently seeing their world. </p>
<p>But this leads to a much bigger issue: in the last 15-20 years, there has been a shift in the political discourse toward a pure focus on economics and the economy as the only barometer of national performance. </p>
<p>Therefore, if everything is reduced to an economic measure, it is hard to understand and most people don’t have a complete or deep understanding of macro or micro economics, then we are drawn toward simple, uncomplicated and emotional measures. </p>
<p>So, when a politician, who you want to believe, says your life is going to be worse off and here’s why, it’s a lot easier to accept that message because it seems rational, it has to some degree numbers around it. </p>
<p>Even a word like tax has connotations that will change people’s perceptions, and is more readily accepted. This is probably why the government used the term Flood Levy, rather than tax. And this is why I find it curious that they continue to use the term Carbon Tax (that said, it is probably too late to change, simply because the government will be criticised for the use of “spin”).</p>
<p>At an individual level, if we think rationally about the carbon tax effects, being told bananas is going up 3c a kilo (when they went up nearly $10 a kilo as a result of Cyclone Yasi), is not going to have a huge effect on the way people buy bananas. </p>
<p>But there is also the issue of locus of control at play. We accept the pain of bananas at $14.99 a kilo because it was caused by natural phenomena. The carbon tax is something that we struggle with because we perceive that we have some level of control, because we voted in these particular politicians.</p>
<p>But it is scary to most people when you talk about this very amorphous thing called the carbon tax. It’s not an issue of whether the government has sold it badly. In fact, it’s more of an issue that they have spent too much time selling it, and therefore consumer confidence or lack of it has had time to fester and be picked at by the opposition. </p>
<p>The problem is that on top of the carbon tax benefits being poorly communicated, it’s also that we’ve had so much time to worry about it. It becomes easier for the worry to be amplified. </p>
<p>The bottom line is that people absorb these kind of changes into their lives reasonably quickly – the GST is a good example – but because at the moment it’s an abstract concept, it’s a lot easier to sell the negative aspects of it because generally speaking taxes come with negative connotations. </p>
<p>We’re all imagining how horrific our lives will be once this kind of thing is introduced. Even though the consumer confidence survey was conducted before the carbon tax was (officially) “announced”, the reality is we already had been talking about it since pretty much Abbott rolled Malcolm Turnbull for the leadership of the Liberal party. </p>
<p>Since that fateful day, in November 2009, Tony Abbott has been relatively successful in making the Labor Party operate in full-time election mode.</p><img src="https://counter.theconversation.com/content/2343/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>No disclosures.</span></em></p>Consumer confidence has fallen by 8.3% to its lowest level in two years, according to the Westpac-Melbourne Institute Consumer Sentiment Index. The drop has been connected to speculation about the impact…Paul Harrison, Senior lecturer, Graduate School of Business, Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.