Five reasons to be (cautiously) optimistic

RBA Governor Glenn Stevens says Australia has got its groove back.

In a speech delivered at a business lunch yesterday, Stevens said that six months ago, he thought the biggest risk to the Australian economy was “an unwarranted loss of confidence in our medium-term prospects”.

But now, Australian consumers and businesses are back on track

“Surveys now suggest that many businesses have found that the worst has not occurred, and are perhaps thinking about their medium-term strategies for the next expansion,” Stevens said.

“They are tending to try to hang on to employees who were recruited and trained at some expense and who will be needed in the future under conditions of stronger demand. Many listed companies are taking the opportunity to raise new equity, strengthening balance sheets. The fact that they can tap the markets for those funds, by the way, says something about the underlying resilience of the system.”

Stevens went so far as to say that while Australia cannot claim to have totally avoided the downturn, “it appears at this stage, however, that the downturn we are having may turn out not to be one of the more serious ones of the post-War era, in contrast to the experiences of so many other countries”.

Stevens went on to outline a number of challenges to our recovery, including inflation, rising interest rates, unemployment and the threat of another house price bubble due to the availability of cheap finance.

Yes, these are concerns that will need to be monitored closely. But if you’ve been skeptical of this whole recovery idea (and I’ll put my hand up there) then Stevens’ speech should help dispel some of those concerns. Central bankers are traditionally extremely cautious, but Stevens has gone out of his way to basically say the worst is behind us.

So in this spirit of growing optimism, here are five more reasons to be cheerful:

Cashflow appears to be improving
Yesterday’s payment terms data from Dun & Bradstreet is really good news. In one of the first signs that the cash squeeze might be finally easing, payment terms dropped 2.6 days to 54.8 days. While D&B chief Christine Christian has warned that payment terms might still blow out again, it’s also worth pointing out that that Australians have never been good payers – indeed, during the boom years of 2006 and 2007, average payment terms hovered around the 55 day mark. Every time we get a fall in payment terms like this we can take it as a good sign.

Consumer and business confidence
As Stevens pointed out, both have risen substantially in the last few months, which highlights the psychological effect that not going into recession actually had. It’s worth noting that confidence indices tend to be extremely volatile, and could fall sharply if unemployment rises. But as a general rule, the more people spend the better they will feel.

The sharemarket
Investors have had a couple of very good weeks and the sharemarket is up for the 12th straight day this morning – and that’s ahead of what promises to be a pretty ugly reporting season over the next two months. There’s little doubt we’ll see more volatility, but investors are even more convinced than consumers and business that we’re headed for better times.

House prices
Again, property is another cornerstone of confidence. While we’ve all been bracing for a big drop in house prices, so far it just hasn’t come. In fact, as Stevens says, there are signs prices are now in some danger of overheating. Given so many entrepreneurs have funded their business through property, it’s a great sign that this sector has held up so well.

Slimmed down businesses
A few commentators have made the point in the last few weeks that the downturn forced many Australian entrepreneurs to trim staff, reduce costs, streamline their business processes and generally become more efficient. This was painful, difficult work, but now it has been done, our smart companies are perfectly placed to enjoy the full benefits of the coming recovery.