Investors were left shaken after hundreds of billions of dollars were wiped from the world’s financial markets following the recent plunge of the Chinese stock market. Although our market has recovered somewhat, we are not out of hot water just yet. The real concern is that the underlying cause of the plunge, the slowing Chinese economy, will have a notable impact on Australia’s economic growth for some time to come.
We talk a lot about China. It must be remembered that the reason is because China is Australia’s largest export market, accounting for one in three Australian exports. As China’s growth rate slows from 10% to a more sustainable rate of around 7%, it is evident that pockets of our economy will slow with it.
Recent figures show that Australia’s growth rate (GDP) has slowed to 0.2 per cent down from 0.9 per cent (last quarter), falling short of market forecasts. As a result of the weakest growth since 2013, consumer and business confidence is down.
Consumer confidence is a key indicator of the overall shape of the economy. It measures the level of optimism consumers have about economic growth and impacts their spending habits.
It makes sense that when you’re feeling confident about your job, your wealth (if housing prices or stock markets are high), you are happy to spend money. Your might spend it on a new car, go out to dinner, take holidays or just buy some new clothes. All these events generate economic activity, create more jobs, which in turn mean less people on unemployment benefits and more tax revenue for a government.
It also works in reverse.
If you’re not feeling confident about your job security, or don’t have the same personal wealth… you don’t spend money as easily. You might pay down your personal debt rather than spend money in restaurants. This means less income for the restaurant you usually visit, which in turn means they may have to reduce shifts, or worse – lay off a staff member. Higher unemployment and less tax money coming to the government ensue.
Businesses think the same too. Why would you invest to expand and grow your company if you aren’t sure if your key markets are healthy? With confidence muted, many companies including Nine Entertainment, Rio Tinto and Fairfax Media have decided to use their profits to buy back their shares instead of looking at growth opportunities. The reason often cited by a company is because it cannot find anything more compelling to invest in.
It’s hard to know if the tail is wagging the dog sometimes, but if businesses haven’t had confidence in the economy in recent times, how can we expect consumers to?
For the most part of the last four years, consumer confidence in the economic outlook has been below average. While economic factors like the end of the mining boom may have been the key drivers of consumer confidence, politics may have also contributed.
Dr Paul Kasian, head of asset management at Equity Trustees Limited, argued multiple leadership changes in recent years is partly to blame for the disrupted investor confidence and lack of consumer spending. Despite the uneasiness that comes with appointing Australia’s fourth Prime Minister in just over two years, it might have come at the perfect time.
Malcolm Turnbull’s appointment to Prime Minister delivered a record bounce in consumer confidence. His track record in business and investing experience has seen the ANZ-Roy Morgan consumer confidence index jump from 7.1 per cent to 8.7 per cent in the week since he took over from former PM Tony Abbott. According to ANZ Chief Economist Warren Hogan, this increase in consumer confidence “is a clear vote of confidence in Turnbull” and boosts confidence above long-run average levels.
It’s all well and good to say Turnbull is a saviour to confidence… But the reality is Turnbull is under pressure. He needs to deliver an economically viable medium-term reform strategy all within a year until the next election.
Despite every policy being up for review, Turnbull has told the ABC that “tax reform is going to be a big part of our reform agenda going forward.” New Treasurer Scott Morrison agrees that changes to the tax system are needed and is interested in “anything that helps people work, save and invest, [and] helps the economy become more adaptive.”
Investment bank Morgan Stanley highlighted that in addition to tax reform, infrastructure spending and productivity were key areas of focus for Turnbull, arguing Australia has the room to accommodate a big economic stimulus.
Regardless of the agenda, Turnbull’s perceived ability to communicate might see his policies pass through Parliament – something which has been a major stumbling block for all his predecessors (and the nation). Policy and confidence might just turn on Australia’s internal economic engine. If the latest consumer confidence survey is anything to go by, companies too might begin to play ball again, and start looking to invest in growth opportunities for their business, rather than their own shares.
We might just start Turn(ing) Bull(ish) the Australian economy again!
