MALCOLM METER RALLIES: Business confidence lifts during Turnbull's first weeks in power

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Malcolm Turnbull’s mission to restore confidence among Australian businesses is off to a good start.

Business confidence rose four points in September in the monthly NAB survey. The bank said the improvement came “as the Government’s leadership uncertainties were resolved, while financial market volatility and emerging market concerns have moderated from the heights of the previous month”.

However the bank also noted that “the improvement in confidence was not broad-based across industries, falling in mining, construction and finance”.

It’s just over four weeks since Turnbull strode out to reporters at Parliament House in Canberra and said he was challenging Tony Abbott for the leadership of the Liberal Party.

Turnbull explained:

“It is clear enough that the Government is not successful in providing the economic leadership that we need. It is not the fault of individual ministers.

“Ultimately, the Prime Minister has not been capable of providing the economic leadership our nation needs. He has not been capable of providing the economic confidence that business needs.

“Now we are living as Australians in the most exciting time. The big economic changes that we’re living through here and around the world offer enormous challenges and enormous opportunities.”

Turnbull hung his hat on being able to imbue the nation’s business community with a sense of confidence. Anecdotally, speaking to business leaders and investors over the past month, people are more upbeat. There’s a sense that Turnbull is more engaged with the real challenges the Australian economy is facing: a slowing China, the attendant need for the economy to fill the enormous hole of economic activity being left behind as the mining boom winds down, disruption of established business models across industries, taxation rates for companies and individuals which are increasingly uncompetitive, and damaging to Australia’s ability to attract overseas investment.

Confidence – how people are feeling about the future – is pretty ephemeral compared to other economic measures.

Happily, there is a long-established agreed benchmark survey in Australia for business confidence. It’s the NAB business survey.

Perhaps we can now call it the Malcolm Meter, because it will show how Turnbull is performing against the Abbott government’s failure to provide confidence.

This year, the NAB survey results have been showing a fascinating trend: businesses have been getting gloomier even though they are reporting the overall business environment improving.

At the end of each month the NAB economics team surveys more than 500 firms of various sizes in various industries, asking about hiring intentions, trading conditions, and their forward orders. They also ask: “Excluding normal seasonal changes, how do you expect the business conditions facing your industry in the next month to change?” This produces the confidence rating.

As this chart shows, it has been tanking this year, but just ticked up.

If confidence is “hope”, then trading conditions are “reality”. So here’s how businesses are experiencing the real world.

These two charts taken together tell an important story about the Australian economy right now: there are encouraging signs about the economy’s direction, but people aren’t feeling great about it.

The risk from here for Turnbull is that many of the factors influencing business confidence are external.

As confidence was across the southern winter, the world was watching Greece hurtling towards a possible exit from the Euro, and the Chinese stock market imploded, falling 45% – not a major economic lever on its own, but enough to start a tough conversation about Beijing’s control over the economy in China, Australia’s largest trading partner. (Certainly, the apparent lack of a convincing economic narrative from the Abbott government wasn’t helping calm the horses.)

Those concerns are now fading – something noted by the NAB team “saying some dissipation of financial market jitters may have also contributed to the result”. And Australia’s economy is once again proving remarkably resilient as the mining boom becomes a memory. Exports from other sectors are picking up with the fall in the value of the dollar. There are many challenges – not least the structural problems in the federal budget – and while growth is slowing, overall, the fundamentals are in good shape and this is reflected in the NAB survey measurement on business conditions.

As this chart showing confidence against conditions shows, the two rarely diverge too far:

In case you’re still wondering if this whole confidence thing matters, at the start of this year, the nation’s two top economic officials, treasury secretary John Fraser and RBA governor Glenn Stevens, briefed Abbott and his senior ministers on why they believed Australia was seeing flagging levels of economic growth. They explained that despite the record-low interest rates, businesses were still reluctant to invest, start new projects, and hire people because of the confidence gap, which was compounded by the now-infamous reaction to the Abbott government’s first budget in 2014.

Today, too, the weekly consumer confidence gauge from ANZ showed a big pick-up in how the general public is feeling about the economy. Turnbull’s run may have been exquisitely timed.

If he can get Scott Morrison talking a sensible path on budget reform, and corral the crossbenchers in the Senate, the conditions are right for Turnbull to lead the restoration in confidence that Australian business has been so desperately seeking.

* This post has been updated from an earlier version to take in the results of the September survey.

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