Where are we in the recovery? A SmartCompany Q&A

After more than 12 months of doom and gloom, it’s time to crack a smile – the economy is finally in recovery mode. Consumer confidence is soaring, business confidence is strong, house prices keep rising – what could be better?

But as economists and politicians are warning, the recovery remains fragile and there are even forewarnings that we could be in for a double dip recovery, whereby the economy is plunged back into reverse.

So where are we in this recovery? Time for a SmartCompany Q&A.

What an avalanche of good news. It is too good to be true?

Not at all. In the last two weeks we’ve seen business confidence hit a six-year high, consumer confidence hit a two-year high, house prices jump 0.9% in July and GDP grow at a surprisingly strong 0.6% in the June quarter.

If you’ve been making plans to take advantage of the recovery – perhaps by ramping up your marketing or buying out a rival – it’s time to swing your strategy into action.

Well, you’re upbeat. But Prime Minister Kevin Rudd keeps tells us we’re not out of the woods. Is he right?

Rudd has really got no choice but to keep trotting out this cautious line. He’s launched one of the biggest stimulus programs in living memory to save the economy from disaster, so admitting that there is no disaster probably won’t go down so well.

But Rudd does have a right to be a bit smug. While his Government may well have overcooked the stimulus a bit, his strong and decisive stimulus measures have clearly helped shield us from the worst of the global downturn.

Are there any real reasons for Rudd’s caution?

There are a few reasons. The biggest worry is unemployment, which has remained surprisingly low despite predictions that the jobless rate could hit 8.5% over the next 18 months. Most economists are still tipping it will rise from the current rate of 5.8%, but the question is how far? A big jump in the jobless rate will minimise household spending and slow economic growth.

The other concern is the gap between soaring confidence and actual spending, both in terms of retail spending and business investment. Westpac’s chief economist Bill Evans noted the gap between consumer confidence and actual consumer spending yesterday (as highlighted by the fact retail sales dipped in July despite a big jump in confidence) while NAB economist Alan Oster questioned whether business confidence might actually be a bit overdone, given business investment remains cautious.

So the happiness of customers isn’t necessarily resulting in wallets and cheque books opening?

Exactly. So while entrepreneurs should definitely be considering ramping up their marketing efforts to attract more receptive customers, they will still need to work very hard to get deals over the line. Don’t think sales are suddenly going to come easily!

Which sectors appear to be recovering most quickly?

The NAB business confidence survey showed broad improvements in confidence, with manufacturing the most confident sector, with the finance, property and transport sectors all feeling very upbeat. Confidence was weaker in the recreational services sector (think gyms and other leisure businesses) and the wholesale sector.

And which sectors are still struggling?

The recovery in the property and construction sectors appears to have been thwarted by difficulties in obtaining finance – don’t expect that to stop any time soon. Recent company results indicate the media and marketing sectors are also doing it tough, although this may start to improve.

What other speed bumps loom over the next six to 12 months?

Rising interest rates could be one issue. A growing band of economists are tipping rates will rise before Christmas on the back on all this good news, but the RBA will probably only increase rates by 25 basis points. But remember, most mortgage holders have seen rates fall by 4.25% since September last year, so they should be well placed to absorb a few increases. “With variable mortgage rates currently 5.8%, their extremely low level is providing a basic support to sentiment. That is unlikely to change until mortgage rates get up to around 6-6.5% at which point rate changes will start to deter households,” Westpac’s Bill Evans said yesterday.

Next year’s Federal Budget could provide another hurdle, particularly if the Government has to take action to cut spending or raise revenue (taxes) to pay for its stimulus measures. Unlikely in what will be an election year, but possible.

Another issue will be the performance of the major economies, particularly the United States and China. Things still look quite sick in the US, with unemployment creeping towards 10%. In contrast, China’s economy continues to grow strongly. If China continues to boom Australia’s economic recovery could gain even more momentum.