Combining Kevin and Glenn for a confidence trick

Coming hard on the heels of a disturbing NAB survey of business conditions and the International Monetary Fund’s latest downward revision of the outlook for global growth, today’s Westpac-Melbourne Institute index of consumer sentiment adds to the pressure on the Reserve Bank to cut rates again and on Kevin Rudd to nominate an election date.

Yesterday’s NAB business survey showed business conditions had deteriorated to their worst levels in four years, which perhaps isn’t surprising given that the ending of the investment phase of the resources boom has exposed large-scale and widespread job-shedding across a slowing economy.

The foreshadowed foreclosure of Ford’s iconic local manufacturing business and the giant question-mark over the future of General Motors’ business and the automotive sector generally have provided high-profile evidence of the parlous position of large slabs of industrial Australia.

Volatility in markets ignited by the US Federal Reserve board’s flagging of an imminent start to the 'tapering' of its quantitative easing program, the slowing of China’s growth rate in the face of the weakening global growth rate and its own internal struggles to bring an apparent credit bubble under control and the continuing instability within the eurozone provide good reasons for businesses to remain defensive.

The abrupt and large depreciation of the Australian dollar, which should provide some relief for trade-exposed industries, doesn’t appear to have had any positive impact on business confidence yet.

The Westpac-Melbourne Institute index showed that while consumer sentiment is holding in positive territory it is still only barely positive and is sharply lower than it was earlier in the year, with consumers concerned about the condition of their own finances even though they are more optimistic about the longer term outlook for the economy.

The gloomy stance of business and consumers has arisen despite official interest rates being at historic lows after the Reserve Bank has cut 200 basis points from the cash rate since late 2011, most recently a 25-basis point cut in May.

What role the extraordinary events in Canberra over the course of this year might have played in the development of the sombre mood is hard to tell, except that after Julia Gillard announced the election date in January she created what effectively became the longest running (albeit unofficial) election campaign in the nation’s history.

The return of Rudd has, by casting doubt on the original September 14 election date, added new uncertainty, not just about when the election will be held but over its outcome.

It is a conventional and long-held wisdom in business, and in the retail sector in particular, that election campaigns are bad for business – consumers hold off discretionary spending and businesses discretionary investment until there is an outcome.

The volatile and combative nature of politics over the past years adds a dimension to this particular pre-election period. Businesses are saying quite clearly that they would like the certainty of a date and, whatever the outcome (other than another hung parliament), to get the election out of the way as soon as practicable.

Both NAB and Westpac expect the Reserve Bank to cut rates again in August. Governor Glenn Stevens’ comments last week in which he said the Reserve Bank board had deliberated for a very long time at its meeting last Tuesday over whether to cut rates may have been "light-hearted" (Reserve Bank board meetings run to a quite tight and established timetable) but the market is now taking it virtually for granted that there will be another cut next month despite the steep fall in the dollar.

One suspects, however, it is going to take a combination of several rate cuts and a clear election outcome before there is any real prospect of a material improvement in business and consumer confidence and even then it would be dependent on domestic and international settings not deteriorating further.