Australia economy counts on post-election confidence
Wayne Cole in Sydney
With Australia’s election just days away business leaders want one thing for certain -- certainty.
Just give us political certainty, they cry, and we’ll be happy to abandon caution and spend like drunken sailors.
Australian business and consumers have been on a three-year roller-coaster ride of minority government with changes of leadership, epic legislative struggles and policy reversals culminating in what has amounted to a seven-month-long election campaign.
The return of some political stability is a tempting thought since a long bonanza in mining investment is rolling over and the rest of industry needs to pick up the slack if Australia is not to face some tough times ahead.
Typically elections have only a fleeting impact on business, largely because the major parties’ economic polices are pretty centrist, with all committed to budget surpluses over time and to an independent central bank.
But this time the mood has become so self-reinforcingly sombre that a decisive outcome could provide real relief.
“This election could be different,” said Paul Bloxham, HSBC’s chief economist for Australia.
“It’s clear that uncertainty over tax and regulations has been a hindrance to investment. Just the thought of some certainty should lift business confidence and give a timely boost to the economy.”
Figures from Deloitte Access Economics showed there were A$452 billion (HK$3.15 trillion) of investment projects underway or committed at the end of March, but there was another A$477 billion-worth up in the air.
Such is the desire for stability that opposition leader Tony Abbott felt he could win votes by promising his government would be one of “no surprises”.
Needless to say business favours the conservative Liberal-National Coalition led by Abbott, which according to the opinion polls, is likely to win a clear majority on September 7.
The ruling left-of-centre Labor Party won kudos for its management of the global financial crisis, but has since been criticised, fairly or not, for making policy on the run.
The implementation of a carbon tax and a new mining resources tax went badly, while constant changes to regulation had business leaders tearing their hair out.
It’s a tight network for upper management in a nation of only 23 million and the gloom became pervasive over time. The Australian Industry Group’s suite of business surveys, for instance, are bleak by any measure.
Its performance of manufacturing index, known as the PMI, the lowest of any developed country. Bizarrely it is even below that for Greece, an economy that has shrunk by almost a quarter in the past five years.
Australia hasn’t suffered a recession for 22 years and was the only rich-world nation to dodge a slump during the global financial crisis.
National Australia Bank’s well-regarded measure of business sentiment slipped to an eight-month low in July, to be well under its long-run average.
“Whether it’s a Labor or Liberal win, a decisive election result is likely to be positive for business confidence,” said NAB senior economist Spiros Papadopoulos.
However, he also noted that survey results for the past 15 years did not show much of a lasting boost following elections. Neither was it clear that consumers would suddenly throw aside their post-crisis caution and go on a spending spree.
“One does not get the vibe that consumers are holding off spending at department stores, or delaying buying a car, or going on holidays, or buying a house, because they are waiting for the election,” he argued.
“The new normal is here, and that involves a lower pace of consumption growth as compared with pre-2008.”
One measure worth watching will be the monthly survey of consumers by Westpac and the Melbourne Institute. This has shown a huge gulf between party supporters, with Coalition voters markedly more pessimistic than those who identify with Labor.
A clear Coalition victory could therefore lead to an outsized increase in confidence, at least for a few of months.
Russell Zimmerman, executive director at industry body the Australian Retailers Association, argued it would not matter which side won as long as it had a clear majority.
“What people want is a majority government. It’s so hard to get things done with a minority,” he said. “If we get a majority government then consumers should respond well.”
A revival in confidence, and so spending, is sorely needed if the country is to deal with the slowdown in mining investment.
The latest government business investment data due on Thursday will provide an important update on the outlook. Capital spending is forecast to have risen around 1 per cent in the second quarter of this year, but that would follow a 4.7 per cent drop the previous quarter.
Crucial will be the Australian Bureau of Statistics’ survey of spending plans for the financial year to end-June next year. The estimate back in the first quarter was for spending of A$156 billion, which beat most forecasts.
Analysts, however, doubt that can last.
“The survey straddles July/August, a period characterised by global growth concerns, low business confidence and elevated political concerns,” notes Michael Blythe, chief economist at Commonwealth Bank of Australia.
He added that the latest estimate would have to be upgraded to around A$161 billion just to keep investment steady as a share of gross domestic product.
With spending by miners likely to cool from here, that leaves the onus on sectors such as manufacturing, services and home-building to help drive economic growth.
“There is a pressing need to lift business capital spending outside of the resources sector,” said Blythe.
There was certainly scope for pick up, since he estimated that investment by the non-mining sector as a share of GDP had fallen to its lowest since 1994. The non-mining capital stock as a share of GDP was at its lowest since 1977.
“These requirements will eventually drive a lift in non-mining capex. A pick-up in demand and a recovery in business confidence would help.”
The whole subject of confidence was very much on the mind of Reserve Bank of Australia (RBA) Governor Glenn Stevens, who recently cited it as a missing link in the economic outlook.
“It is somewhat concerning that the business community’s confidence has been quite subdued in recent times,” he said in late July.
That might well have been one reason the central bank chose to cut interest rates to record lows just a few days after the speech, though Stevens sounded far from certain that lower borrowing costs would revive the country’s animal spirits.
“Unfortunately, it is not a straightforward thing to turn sentiment around,” he conceded. “There’s no such thing as the ‘confidence policy lever’.”