Tuesday, June 09, 2009

We have confidence in confidence itself

As Julie Andrews would have said

Which is good, because the underlying reality is still pretty awful

Labor's May budget appears to have passed its first test, sparking an extraordinary wave of renewed business confidence that has neutralised months of negative sentiment.

The National Australia Bank business survey conducted in the weeks after the Budget saw the confidence index jump from minus 14 to minus 2, meaning that the number of optimists is now close to matching the number of pessimists. A figure of zero would see the number of optimists and pessimists evenly balanced.

The jump in confidence is the biggest in almost a decade and puts the index back to where it was the financial crisis that folowed the collapse of Lehman Brothers in September.

"The recovery is broadly-based but particularly marked in domestically-driven industries with notable improvements in the construction, manufacturing and wholesale sectors which have taken heart from the infrastructure spending," said NAB chief economist Alan Oster...

"The Budget has clearly raised hopes of a government investment-led recovery, with construction industry confidence leading the way."

Prime Minister Kevin Rudd welcomed the turnaround declaring it to be "a strong indication that we have made some progress in our strategy of nation building for recovery and that the government's investment in the economy is having an affect".

But the NAB survey shows that confidence has jumped at a time when most objective business condtions are deteriorating.

Forward orders, trading conditions, employment and export sales all worsened in May with the impact of improved overseas economic conditions dented by the rising Australian dollar.

NAB is forecasting a retun to negative growth in the June quarter and further interest rate cuts before the year's end as conditions deteriorate.

The ANZ measure of measure of job advertisements for May shows vacancies stabilising at levels "consistent with outright declines in employment throughout the rest of 2009".

Employment figures for May to be released tomorrow (THURS) are expected to show renewed job losses after a surprise dip in the unemployment rate from 5.7 per cent to 5.4 per cent in April.

The Melbourne Institute consumer confidence index to be released this morning (WED) will indicate the extent to which consumers share the optimism of businesses aobut the Budget.

Access Economics warns today of a looming end to the boom in consumer spending brought on by the series of multi-billion dollar cash handouts, predicting a "very tough 18 months" for shopkeepers.

"The focus of the stimulus in the Budget has shifted from cash handouts to infrastructure and the prospects for further stimulus packages are more limited. That means that retail sales growth will be driven more by the underlying economic fundamentals, which are not strong," the report says.

Access predicts no growth in retail sales in real terms until 2011.

In a seperately released study BIS Shrapnel says that even after consumers spending recovers retailing will remain "much less lucrative" than in the past.

"Households won't go through the same debt build-up that drove retail growth earlier this decade. And with governments focussing on reducing debt, there won’t be tax cuts to boost household disposable income," the report's author Frank Gelber says. "Retail margins are unlikely to reach the dizzy heights of the golden age."