At last some sense on the role of “confidence”

While intellectual lightweights and rhetoricians continue to whine that the only issue confronting the Australian economy is “confidence”, in its review of the week ahead this morning, Macquarie Bank makes a simple observation that says it all for me:

Business and consumer confidence data will be released in Australia, with wages data the other main point of interest. New Zealand will also receive an update on how optimistic their households are, as well as the strength of retail spending in Q2.

Impact

• The NAB business sentiment survey will be closely scrutinised for any signs of rising confidence now that the RBA Governor has identified that as a necessary condition for stronger growth. Meanwhile, policymakers have become quite relaxed about signs of slower wages growth and will seek confirmation of that trend with the June quarter data. But while slower wages growth is good for inflation, it poses a further challenge for embattled retailers.

Analysis

• In a recent speech, the RBA Governor indicated that there were four things that needed to be in place for the economy to successfully negotiate the end of the mining boom. The first three were decent global growth, good policy and competitive businesses. The final ingredient, however, was confidence.
• The Governor then went on to say that “it would be good if there was a bit more confidence in the business community about the future. Unfortunately, it is not a straightforward thing to turn sentiment around. There’s no such thing as the “confidence policy lever”.

• Looking at a chart of business conditions and confidence does not, however, suggest that firms are excessively pessimistic. Rather, it suggests that companies are cautious because conditions are weak. And while the RBA does not have a ‘confidence policy lever’, it does have the ability to improve business conditions.
• In our view, this requires a combination of lower interest rates as well as a lower A$. But it may also require a commitment from the central bank that it will do ‘whatever it takes’ to ensure that business conditions will improve. And if that was forthcoming, we think it would go a long way to turning around sentiment.

Exactly right. Confidence is a function of performance, not the other way around. If you reverse them all you get is arrogance.

I’m not sure lower rates will do it except to the extent that they do lower the dollar.