Why January 2013 gives reason for optimism

A month into 2013, and the economic indicators aren’t good.

Australia’s leading economics wonks forecast unemployment to rise to 6%, growth to slow to 2.0-2.5% and the mining boom to recede. For the most part they’re pinning their hopes on resurgence in 2014 rather that this year.

“The Australian economy has softened, with leading indicators suggesting the first half of 2013 will be difficult,” wrote NAB’s chief economist Alan Oster in a briefing note yesterday, a sentiment echoed by other statistics-watchers. And that’s before you even consider any uncertainty caused by an unprecedented eight-month federal election campaign.

Nonetheless, while the economists prepare for another hard slog of a year, it’s possible to discern a sense of optimism among consumers and investors.

For two weeks the stock market has been going up and up. The 10-day winning streak is the longest since October 2003, according to The Australian Financial Review.

Last week also saw the conclusion of the annual Davos conference in Switzerland, where for the first time in several years, the heavy-hitting businessmen and politicians gathered there discussed issues other than the imminent collapse of Europe or the risks of a ‘double-dip’ American recession.

A recent survey suggests the optimism of our CFOs has risen sharply from the middle of last year.

And market-leading company Wesfarmers – the owner of Coles – posted improved sales in the three months to December (up 5% on the previous year).  

“Most of the economic indicators are still pretty weak,” cautions AMP chief economist Shane Oliver.

“On that front, the share market is sort of out on its own. It’s had a very strong start of the year.”

Nonetheless, Oliver expects that by year’s end, we’ll look back on 2013 as having been a more positive business environment than 2012.

Oliver doesn’t discount the impact of a rising share market; he says it’s generally a ‘forward-looking’ indicator – a herald of things to come. Share markets usually rise in January, but this year’s rise has been above trend.

“If I was a businessperson, I would treat [the rise in the share market] as a positive sign. Investors are starting to sniff out signs of growth.”

Other forward-looking indicators have also moved in positive directions. For example, consumer confidence edged up in January (though pollsters differed on how much. The Westpac Melbourne Institute index rising 0.6% to 100.6 points).

Business confidence rebounded in December 2012 from sharp low the month before.

In America, for the seventh straight week, more money has been flowing into funds exposed to stocks over bonds, reversing a trend that has held since the start of the global financial crisis.  

The biggest boost to the Australian economy in 2013 will probably come due to a global recovery, Oliver says. While many economies are still struggling, he says, fears of catastrophe – the collapse of the EU, another American recession or a ‘fiscal cliff’, or a ‘hard landing’ in China – have subsided. “If anything, Poland now wants to join the EU, which shows how those fears have receded.”

Overseas events have a huge impact on Australian consumer and business confidence, and so the end of the bad news will have a positive effect.

“We like to think we’re immune, but history tells us that overseas swings do have a strong effect on Australian conditions,” Oliver says.

“From China, there’s a direct impact – through trade – as well as an indirect one through confidence. With Europe and the United States, the main impact they have on us is indirect, through the buoying or sinking of our confidence. That can be quite significant. The drip-flow of bad news in 2010, 2011 and the start of 2012 certainly played a huge role in dampening confidence here.” 

The cooling of the mining boom is another positive coming into 2013; Oliver says the boom has stressed the non-mining sectors of the economy. While a fall in mining investment could lead to weaker economic indicators, it’s not such a bad thing for many parts of the economy, which have been struggling in recent years.

“With the record increase in mining activity, the rest of the economy had to be kept under thumb to make way for that boom, otherwise we’d overheat. That was the explicit policy of the RBA. But with the mining boom cooling down, for many businesses it’s a positive. They’re freer to grow now. They have less competition for resources like labour, and interest rates have been lowered, which will continue to have a positive effect all through the year.”

And the federal election? Oliver thinks its impact will likely be minimal.

“We knew it would happen, and we knew, vaguely, when it was likely to happen.

“The area of uncertainty is the carbon tax, but that’ll probably linger even after the election. Even if the Coalition [who has pledged to repeal the carbon tax] wins the lower house, they probably won’t win the Senate.”