Can confidence create the conditions for growth?

Australia’s improving domestic management of the COVID-19 pandemic, an end to the lockdowns in Victoria and Melbourne in particular, vaccine progress, fiscal stimulus and political developments in the United States over the last few months appear to have provided a very significant boost to consumer and business confidence. Whether this is enough to see animal spirits emerge and economic growth prosper in 2021 only time will tell. However, the correlation between some of these confidence indicators and economic indicators suggest there are reasons for optimism.

The Westpac Melbourne Institute’s Consumer Confidence Index has seen a significant improvement with the most recent reading of 107.66 being the highest reading since 2013.

Consumer confidence has been a reasonable lead indicator for retail sales historically, specifically when the changes in consumer confidence have been significant. This is important given consumption is the largest component of Australia’s Gross Domestic Product (GDP).

The Household Savings Ratio has lifted in the last 6 months to 19.8%, or 24.8% if superannuation withdrawals are included, allowing significant household balance sheet repair.

The Reserve Bank of Australia has estimated that around 5% of household disposable income has flowed into offset and redraw accounts since March 2020, providing households with a savings cushion in the event of further unforeseen economic disruption.

Reductions in interest rates have resulted in lower interest payments and higher housing loan principal repayments.

Credit card repayments have also been a feature of 2020. Higher savings, falling housing debt balances and lower outstanding credit card balances provide ample capacity for retail consumption to increase in an economic recovery.

National Australia Bank’s Business Confidence Index has also seen a material improvement in the last few data points, suggesting that businesses are feeling more optimistic about the economic outlook. This rise has been matched by an improvement in the Business Conditions Index suggesting that the fiscal and monetary policy support is having a positive impact on business operating conditions. Trading conditions, profitability, forward orders and capacity utilisation have all shown improvement in recent months.

This could potentially be good news for unemployment. Historically the NAB Business Conditions Index has been a reasonable lead indicator for a fall in the unemployment rate.

There are a variety of positive signs emerging for the Australian economy as we look forward to 2021. As Reserve Bank of Australia Governor Dr Philip Lowe said on the 16^th of November, “the recent data have been better than expected and the easing of restrictions has lifted spirits”.

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