Can confidence create the conditions for growth?

Tim Carleton

Auscap Asset Management

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 16th of November, “the recent data have been better than expected and the easing of restrictions has lifted spirits”.

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Tim Carleton is a Principal and Portfolio Manager at Auscap Asset Management (Auscap), a boutique equities long/short investment manager. This article contains information that is general in nature and does not constitute investment or any other form of advice. This article does not take into account the objectives, financial situation or needs of any particular person nor does it constitute a recommendation to be relied upon when making an investment or any other decision. You need to consider your financial needs before making any decision based on the information in this article and a person should obtain and consider the relevant disclosure document before deciding whether to invest in an Auscap fund. No part of this article is to be reproduced or disclosed without the prior written consent of Auscap. In relation to any MSCI data in this article, the MSCI data is comprised of a custom index calculated by MSCI for, and as requested by, Auscap. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (

Tim Carleton
Chief Investment Officer
Auscap Asset Management

Tim manages the Auscap Long Short Australian Equities Fund which targets solid absolute risk-adjusted returns, looking to invest in companies that generate strong cash flows and are trading at attractive prices.

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