Prime Minster Julia Gillard says this election is all about the economy. The only problem is that we’re not sure exactly which economy she is talking about.
Is it the one where booming exports from the mining sector have helped Australia post a record trade surplus? Or is it the one where weak retail sales and a weakening housing market have resulted in falling business confidence and conditions?
Getting an accurate read on the Australian economy is difficult right now. While we are supposed to be in recovery mode following the GFC, many industries – particularly the struggling retail sector – are doing worse this year than they did during the GFC.
As the still-fragile economies of the United States and Europe stare down what could be another slowdown, should Australian entrepreneurs be worried that our own recovery is losing steam?
Time for a SmartCompany Q&A.
What are you doing to me? I thought the economy was trundling along quite nicely, thanks very much.
In many ways it is. Unemployment remains incredibly low at 5.2%, GDP growth is running at 2.7% and inflation appears to be pretty much under control according to the RBA. Despite what the politicians might try and say, our Federal Budget position is good and our net government debt remains low. And as mentioned previously, yesterday we recorded a record trade surplus, with exports surging 7.1%, versus a 0.2% increase in imports.
See, things are ticking along very nicely. Why are you being all negative?
Well, there is a bit of bad news. Just this week we’ve had a 5% fall in new home sales, a drop in building approvals, weak retail sales figures, a rise in insolvencies and bad debt claims and a record increase in outbound tourism, which suggests Australia’s local tourism market is struggling.
On top of this, yesterday we saw a particularly worrying result from the Australian Industry Group’s Performance of Services index, showing the services industries – including wholesalers, retailers, hospitality companies, transport companies, financial services and property and business services – in real trouble. The index fell 2.2 points to 46.6 (below the 50.0 level separating expansion from contraction) and also showed a big drop in sales across a majority of industries.
This weakness was further underlined with a profit downgrade from retailer Kathmandu, which sent its shares tumbling. In recent weeks we’ve also seen profit warnings from the insurance, construction, IT and franchising sector.
Right, anything else?
Yesterday we also saw the release a survey of business confidence and business conditions from the Australian Chamber of Commerce and Industry which showed general business conditions, sales and wages are falling.
Finally, we’ve also seen the great indicator of Australian household wealth – house prices – fall in the last month, although of course house prices have been very strong over the past 12 months.
It’s a confusing picture. What about the impact from overseas?
As we’ve been saying a lot in the past few months, things remain extremely fragile in the big economies of North America, Europe and even Asia, where Japan continues to struggle. Fears of the US entering a second recession are still lingering and commentators are also still nervous about the possibility of some sort of slowdown in China.
All of this isn’t great news for Australia, as it would likely lead to further falls in commodity prices and that could take some steam out of the mining sector.
So the talk of a two-speed economy is really spot on, isn’t it?
It does appear that way. While another mining boom is kicking off, employment remains strong (partly because of the ageing of our population), and strong government spending is helping out sectors like construction, there are clearly big parts of the wider economy that are doing it tough.
At the heart of this is what economists are calling Australia’s new conservatism. We have good jobs (and pretty good job security), we have expensive houses (with relatively low interest rates) and we know we are doing pretty well compared to the rest of the world, but we are very, very nervous about spending.
And that frugality is proving very hard to shake.
What’s the message for entrepreneurs?
On the surface, the economy will keep running along nicely, with average economic growth, strong employment and strong experts.
But we must be aware that the economy has lost some of its momentum in recent months and this recovery has not taken hold like most commentators expected. This means it is going to take a long time for these conservative consumers to come out of their shell. A prolonged period of discounting and fighting for customers looms for retailers and other services businesses. The residential housing recovery remains stalled and probably some way off. Banks are likely to remain very nervous about lending to business. And growth is not going to come without hard work and innovation.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
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