May 30, 2014

Big week of data may send bears into hibernation

After a series of soft economic reports, yesterday's investment figures were better than expected. Next week should leave us much better informed about how the economy is going, write Glenn Dyer and Bernard Keane.

Next week is going to be one of those two or three such weeks each year when by its end, we will have a deeper understanding of the direction of the economy -- although with the qualifier that the impact on business and consumer confidence of the budget remains to be seen. We have already seen early signs of the damage from the budget in a fall in consumer confidence, but the question is whether that has continued into this month. We will get a sign of that from the Fairfax Media (Nielsen) and News Corp (Newspoll) opinion surveys due on Monday and Tuesday. But next week we'll also see the first-quarter economic growth figures, as well as quarterly data on wages and profits, trade and investment, as well as government finance, and the important building approvals, trade and retail sales figures for April. Treasury will also be appearing before estimates, giving the government, via Treasury secretary and Malcolm Turnbull dining companion Martin Parkinson, the opportunity to explain its budget strategy and likely impact on the economy. Yesterday there was a major surprise that confounded many of the bears and raised the prospect the economy's rebalancing is more advanced and more soundly based based than many forecasters had thought, including federal Treasury and Treasurer Hockey. The stronger-than-expected business investment figures for the 2014-15 financial year surprised forecasters who were looking for another doom-and-gloom set of numbers. Yes, the current spending figures for the present financial year were weaker -- a fall of 4.2% in the three months to March compared to a forecast fall of 1.6%, and the estimate for 2013-14 cut by 2.5% to around $162 billion -- though many analysts forgot to mention that will still be the highest annual investment figure in history. But what surprised everyone was the sharp improvement seen in the second estimate for expected investment for 2014-15. Instead of a 17% fall, as the first estimate three months ago suggested, the drop was revised back to a fall of 10%. That's still a substantial fall, but the actual amount that could be invested by business rose $12.1 billion to $137.06 billion. If achieved, that would be the fourth-highest annual figure in history -- so it's not exactly the bad news some analysts have claimed. And coupled with spending on residential construction rising to an annual rate of more than $45 billion in the year to June 2013, many economists started changing their tune. Why? Because instead of a black hole for investment in the next year (the filling of which is the main economic strategy of the budget, with the emphasis on infrastructure spending), it seems now the economy may be making the transition from the resource investment boom to a broader growth -- or in the world of economists, the economy seems to be rebalancing without many of the problems everyone had warning could occur. That's been the goal of Reserve Bank's low interest rate policies, which have been enabled by the continued strength of the dollar, which, for all the problems that continues to cause the budget and many exporters, is helping keep a lid on cost pressures. At the same time, the sluggish labour market has crimped wages growth so hard that it is now at 17-year lows, and helping many businesses to start thinking about investing more, or relieving pressure on cost bases from weaker sales growth in some sectors. And buried in yesterday's figures was another positive: mining investment was much stronger than forecast and was in fact up on earlier estimates, with an increase 7.8% (or $5.7 billion). There was also an extra $5.9 billion of investment from other industries, a sign that business is getting a bit more confident, including rises in expectations of "equipment, plant and other" investment and buildings and structures capital expenditure. All this means the forecast in the budget for growth to slow in 2014-15 to "trend" (around 2.5%) with unemployment rising to 6.25% might be too pessimistic. If investment continues to hold up into the new financial year, the government's financial position actually could improve as the year goes on -- although that will also depend on the Senate, and in particular on Clive Palmer. Palmer will know that, should he start being more co-operative with the government about its legislation, The Australian, which is acting as the Coalition's standover man against him, will pause its incessant campaign against his business activities. When to do so will be a straightforward business decision for Palmer. For now, however, he's gaining too much from kicking the Coalition to be too worried by the rage of his one-time friends in News Corp. But by this time next week, however, we should be better placed to make a call on whether the bears ought to go spend the winter underground or whether the budget forecasts will be proven correct.

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