[HSC] Economist — 16 July 2017

The week in review.

This series of weekly articles aims to compile the important economic news of the week into bite-sized summaries with HSC-specific takeaways. 
You can expect a new article every Sunday at 6pm!

This week was very metrics-focused. We’re seeing contrasting results for business and consumer confidence levels as well as an appreciation of the Aussie Dollar to levels not seen in 2017.

Required Readings

  • Business confidence is at its highest point since the GFC, but consumers aren’t so sure.
  • The Australian dollar has climbed to US78c, it’s highest level in 2017.

1. Business Confidence

That divergence on the far right is what’s interesting.

The results of NAB’s business survey for the month of June were published this week, with business confidence returning a figure of +9, significantly above the long-run average of +6 and the highest result since the GFC.

Strong growth in wholesale, construction and manufacturing industries spearheaded this result. Even the retail sector, which has been hammered by Amazon’s entrance into the Australian market in recent months, saw conditions improve. At the other end of the spectrum, the sentiment within the mining sector deteriorated due to continuing low commodity prices and the ongoing transition prevalent in the Australian economy.

However, the strong improvements in business confidence were not entirely reflected in the consumer confidence figures, which were also released this week. Whilst consumer confidence increased marginally to 96.6, it remains below the benchmark of 100. This can be interpreted as the number pessimists outweighing the number of optimists. Gareth Aird, a senior economist at CBA, explained that “the disparity between business confidence and consumer is really just reflecting the difference in where the income is flowing”. This idea is supported by the near record high underemployment and stagnation of wages growth present in the Australian labour market.

HSC Relevance

  • Business confidence is a key influence upon investment decisions and improved conditions could see an uptick in investment, increasing aggregate demand.
  • The mining industry being the worst performing industry adds weight to the argument that Australia is transitioning away from a mining-led economy to one centred around services.
  • The weak consumer sentiment has negative implications for the consumption component of aggregate demand and is a product of two prevalent issues in Australia’s labour market; low wages growth and underemployment.
  • The disparity between business and consumer confidence is indicative of the widening income inequality gap in Australia.

2. Appreciation

The Australian dollar has appreciated recently and at the close of trade on Friday it was at US78.28c, the highest close since May 2015. The recent appreciation stems from strong economic performance domestically and in China, a slight uptick in commodity prices and weaker than expected economic results from the US.

The improvements in confidence outlined above were one domestic factor that contributed to the strengthening of the dollar. In addition, consumer’s inflation expectations have risen and are returning towards trend levels, placing upward pressure on the exchange rate.

Furthermore, as discussed last week, Australia’s trade balance jumped to a surplus of $2.5bn in May. This result was driven by a marked increase in Chinese imports. Moreover, the impact of this upon Australia’s exchange rate has been magnified by the recent increases in commodity prices, with iron ore closing at a price of $US64.92 per tonne on Friday, compared to $US57.86 in June.

The factors outlined above are sufficient to have caused an appreciation of the dollar, but the improvement against the Greenback has been exaggerated by slightly weaker than expected results emanating from the US this week. In the last month retail sales have fallen slightly and headline inflation came in at 1.6%, lower than the May result of 1.9%, causing international capital flows to shift towards Australia.

HSC Relevance

  • Similar to in 2009 and 2010 but on a smaller scale, the AUD has appreciated as a result of strong demand from China and rising commodity prices.
  • The high AUD may worsen the international competitiveness of exporting industries and conflicts with the RBA’s desire for a low exchange rate to aid the transition occurring in the Australian economy.
  • The significance of commodity prices shows the continuing importance of mining exports even whilst mining investment is declining. This is because whilst the investment phase of the mining is ending, but the production phase is still in full force.
  • The AUD has risen 7.6% against the US dollar this year, however the TWI has only appreciated by 3.1%. This demonstrates that bilateral exchange rates are often more volatile and consequently less reflective of the domestic economic situation.