Paul Bloxham of HSBC appears at the AFR today to blame it all on confidence:
The Australian economy’s biggest problem at the moment is a lack of confidence. Both business and consumer confidence surveys show Australians remain worried about the future and this makes them reluctant to spend. The coming election offers our political leaders the chance to fix this, but to do so they must first understand its cause.
Pinpointing what makes confidence rise or fall can be tricky, but we think domestically the current weakness has its roots in three things.
The first has been the long wait for the federal election itself, which is coming to an end now that it has been called for September 7. Former prime minister Julia Gillard’s unusual tactic of announcing an election nine months in advance has encouraged businesses to delay new hiring and investment decisions until there is greater certainty over what changes might be made to the local tax and regulatory environment.
…The second culprit appears to be unrealistic expectations. Households and businesses still seem to think the economy will go back to how it was prior to the global financial crisis. This is unlikely.
Finally, confidence has been weakened by businesses concerns about high costs and inefficiencies caused by a complex tax and regulatory environment, and ailing infrastructure. There is a role for government to remove some of these hurdles, which should, in turn, lift productivity.
As I’ve argued before, and Bloxo is agreeing with, confidence is the result of economic conditions not the cause of them. There has no doubt bben some small impact on government spending dependent sectors because of the election. Power generators might be an example. But beyond that,I’m not sure why consumers would alter their behaviour owing to an election. I haven’t.
Unrealistic expectations is not a cause. If confidence is depressed in sectors undergoing structural change then suppressed confidence and cutting back is appropriate.
The last fact isn’t related to confidence either. If we’re being slowed by bureaucracy then that’s the cause.
To be honest, why any of these is nominated as driving Australia’s slowing economy when a once in hundred year mining boom is unwinding before our eyes I don’t know.
Meanwhile, Stephen Koukoulas’s forecasts for two years of explosive growth has now been outflanked by a bearish RBA and Treasury yet he’s doubling down:
Business has been scratching and complaining about the soft economy for some time. Policy stimulus will arrest this weakness. The business sector is obviously welcoming of the interest rate reductions as they boosts their cash flow but also should spark a lift in investment and spending.
Business should also welcome the news on fiscal policy which allows the automatic stabilisers to work – especially in the form of lower tax revenue for the government, which leaves money in the pockets of the private sector.
The current soft patch for the economy demands easier policy.
When growth lifts back to trend and above next year, both monetary and fiscal policy can, should and probably will be tightened. That will be the time to deliver higher interest rates and government spending cuts and to allow the tax receipts to flow into the government coffers.
Has monetary easing lifted business confidence so far. No. Why? Because demand sucks. Consumers want to save as unemployment keeps rising because business investment is falling as the mining boom unwinds. These two forces are a feed back loop. Rate cuts aren’t going to break it. Fiscal spending would.
Then there’s “Mad ” Adam Carr:
Anyway, spending should be stronger when there are no structural headwinds to growth. That it’s not comes down to one thing and one thing only. As I’ve argued for a long time, only confidence is the issue, and this idea is gaining much more traction lately – thankfully. The Reserve Bank governor has spoken on it twice now. However, opinions vary as to the cause of it and what should be done. Rate cut nuts argue – and really I think this is quite idiotic – that we need still lower rates, and there were plenty of business groups over the weekend demanding more.
Or Clifford Bennett at the ABC:
Well I think there’s too much of looking forward in a linear fashion. I think we have to see that the economy is in a dive at the moment.
I mean really the domestic economy has been in trouble for many years and it’s been masked by the resources boom and that mask has been lifted and people are seeing the situation for what it is. Certainly as a hold-back of fresh investment prior to the election.
So I’m seeing a dive now, I’ve always forecast about 1.8 per cent GDP for this calendar year, 4.5 per cent GDP for next year. I see the pullback of investment, that pullback having to be unleashed into the economy and it will a change of government would be a catalyst but certainly after the next election there will be a fresh investment wave and I don’t think the resources boom is over in terms of supplying product to Asia. In fact demand is ever-increasing.
So therefore we’re going to have an ongoing demand for our exports and we’re going to have a domestic economy that could well bounce back particularly as Robert’s mentioned, there is reform in terms of small and medium sized businesses.
Having this discussion without mentioning the mining investment cliff is a bit like worrying about the pimple on your arm as you leap from The Gap.
