The Intelligent Investor Growth Fund is listing on the ASX. Initial Offer closes Friday.

Abbott win no guarantee of blue sky

There is a generally held belief that a Coalition election victory will lift business confidence and business conditions out of the cellar they sank into this year as the Labor government tore itself apart.

There is a generally held belief that a Coalition election victory will lift business confidence and business conditions out of the cellar they sank into this year as the Labor government tore itself apart.

The trouble is, business conditions are actually not in the cellar. They are subdued, but are nowhere near recession levels. They are also not much worse than they were at the end of last year, before Julia Gillard's January 30 election announcement.

History also tells us that businesses don't actually rate elections very highly. They care much more about actual conditions on the ground - and like the battleships that Prime Minister Kevin Rudd says might eventually be moved from Sydney's Garden Island naval base to Brisbane and points north, business conditions take time to turn around.

The monthly surveys of business confidence and business conditions that are curated by NAB chief economist Alan Oster are the bedrock for examinations of what businesses are thinking and doing. In them, a neutral result represents a balance - between pessimists and optimists in the confidence survey, and between those seeing a deterioration in trading conditions and those seeing an improvement in the conditions survey.

Last November the confidence survey was very weak, at minus 9. It recovered to plus 2 and plus 3 in December and January, was in balance in February, at plus 1 in March, negative 1.6 in April, negative 1 in May, just short of being in balance again in June, and at minus 3 in July.

Confidence has therefore weakened moderately in the past six months to be well below the survey's long-term average of plus 7 (Oster launched the monthly survey in 1996), but still far above its lows. It was minus 8 in surveys in June, August and September 2008 ahead of the collapse of Lehman Brothers, for example, and plunged to minus 30 in October and November as the fate of the financial system hung in the balance. There was another huge reversal after the September 11, 2001 terrorist attacks on the United States, from plus 17 ahead of them to minus 15 after.

NAB's business conditions survey registered readings of minus 6 in November and December last year, minus 3 and minus 4 in January and February of this year, minus 7 and minus 6 in March and April, minus 4 in May, and minus 7 in June and July.

You can see a tentative improvement in conditions in the first months of the year petering out in subsequent months, and the long-term average for the survey is plus 5. Again, however, conditions are well above their lows. In a recession the reading would be about minus 20.

NAB also separately surveys small- and medium-sized businesses. In the June quarter, more than 40 per cent of them rated government policy and tax as a problem. Only demand and cash flow worried them more, and about 60 per cent of them disapprove of the Rudd government.

They felt the same way in the final years of the Keating government, however, and they are actually more confident than larger companies, with a score of plus 2 in the NAB's June quarter survey, up from minus 7 in the previous quarter. SME trading conditions improved from minus 12 to minus 6 over the same time.

None of this means there would not be a quick, positive business reaction to a Coalition win. There would be a sentiment sugar hit if the election ended the minority government and the ad-hoc decision-making and infighting that has dogged it.

Key Coalition promises to repeal Labor's carbon pricing regime, kill the mining tax and readjust labour market rules to give employers more power would become complicated if, as expected, the Coalition failed to win control of the Senate, however, and the Coalition is going into this election promising wholesale reviews of the financial system and tax system in its first term. There has also been speculation that one of its early decisions would be to stage a mini-budget, probably in November.

Oster's conclusion is that there is no sustained connection between elections and business confidence and conditions. It is conditions on the street that matter, he says - and they are soft.

Gross national expenditure has been negative for two quarters, and was up only 0.3 per cent in the year to March. The mining investment boom is ending, and as Merrill Lynch Australia economist Alex Joiner notes in his analysis of the confidence equations, Reserve Bank cash rate cuts have not yet repaired the mutually reinforcing links between household and business demand.

The household savings ratio has stopped climbing in the wake of the crisis, but households are spending more on needs and less on wants. They are worried about job security because companies are reacting to soft household demand by cutting jobs, and their income is growing at 4 per cent compared with 7 per cent before the crisis struck.

Turning it all around will be a slog: expect a Coalition victory sugar hit, but also expect it to fade.

Join the Conversation...

There are comments posted so far.

If you'd like to join this conversation, please login or sign up here

Related Articles