Wednesday, August 12, 2009

Confident, But Not Too Confident.

It is certainly encouraging that business confidence is rising, as shown in survey results from the National Australia Bank. At the same time there are also suggestions that consumer confidence is also improving, adding even further to the good news. It seems that there is increasing reason to be confident, with the rise in unemployment lower than expected, and an increase in home lending, both pointing to economic conditions being less dire than previously predicted. It would seem that even if we are not out of the woods yet, perhaps we are coming into a clearing.

It would be fairly easy to get a bit carried away with the good news lately, even though the news isn’t really all that good, just less bad than we had feared. Much of the apparently good news reflects other factors which help to cast a rosy tint over the outlook. For example the leveling out of unemployment appears to be good news, but it masks the reality that full time jobs are dwindling, and it is an increase in part time work which is propping up the figures.

This is further born out by the results of research by the Australian Industry Group which has found that half of Australian businesses have scaled back the number of hours worked in order to avoid job losses. In addition to that, 17% of businesses have cut back the pay of senior executives. The net result is that while people still have jobs, which is good, they have less disposable income, which is not so good.

The problem is that much of the economy depends on consumer spending, and if consumers have less money to spend, or even if they are simply worried about their future job security, the result can be a fall in consumer spending. To some extent, we are already seeing that with the June retail sales figures falling, although much of the fall has been attributed to the fact that the cash bonus stimulus payments have now dried up. There is some concern also that when the first home buyers boost also comes to an end there will be a similar slow down in the property and construction market.

Long term, the prospects for the Australian economy remain good, in fact far better than many other countries around the world, still grappling with the effects of the Global Financial Crisis. But that too means that some of those effects will still be felt here for some time yet. Wayne Swan is right when he says that to abandon the stimulus spending now would be to pull the rug out from under the recovery. In fact, it is too soon to definitively claim that a recovery has begun. It may be that we still have to plunge further into those proverbial woods, before we can find out way out of them entirely.

Confidence is a good thing, and important to the economy, but it would not necessarily be a good idea to become over confident.

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