Australia is in a meerkat market as animal spirits remain wary
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Australia is in a meerkat market as animal spirits remain wary

Animal spirits are Australia’s missing link as the new year begins. They are there, but they are timid: you might call this a Meerkat market.

Animal spirits are Australia's missing link as the new year begins. They are there, but they are timid: you might call this a meerkat market.

The Westpac-Melbourne Institute survey of consumer sentiment that was taken in December revealed that consumers were as gloomy as they were at the tail-end of the global crisis in May 2009. Their views on economic news, budget and taxation news and employment news were as negative as they had been since March 2001, September 1986 and December 1975 respectively.

Animal spirits are Australia's missing link.

Animal spirits are Australia's missing link.

Business conditions were in line with the long-term average in the NAB's November index of business conditions, but NAB's business confidence index continued a decline that began in the middle of 2014. It was still marginally positive at plus one, but key industries including wholesale, mining and transport were negative, and it was well below its reading of plus 12 points in September last year when the Abbott government was elected.

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Statistics released by the Reserve Bank on December 31 showed that housing lending rose by 7.1 per cent in the year to November, up from growth of 5.1 per cent in the year to November 2013. Personal lending rose only 1.1 per cent compared with 0.9 per cent a year earlier, however, and business lending growth for the year remained subdued at 4.6 per cent, albeit up from an even worse 1.8 per cent in the previous year.

The contrast with the United States is illuminating. America's economy expanded at an annual rate of 5 per cent in the September quarter, almost twice Australia's third quarter growth rate of 2.7 per cent. Its unemployment rate is 5.9 per cent, below Australia's jobless rate of 6.3 per cent, and down from a high of 10 per cent during the global crisis.

US consumer confidence is at highs last seen at January 2007, and optimism about the economy is the best it has been for a decade. America's lending growth is also stronger. Bank credit overall rose by 7 per cent in the year to October. Consumer credit grew by 4.3 per cent, and commercial and industrial loans rose by 12.6 per cent.

When I visited Wall Street a few months ago, the mood was the best I have seen since the global crisis. Companies were being told by investors to focus less on dividends and share buybacks and more on growth strategies including acquisitions. Those that did launch bids were being rewarded with share price bumps.

Last Monday's solid share price jump for Programmed Maintenance Services after it confirmed that it made a takeover approach to Skilled Group was an example of the same dynamic here, but it is far less developed in this market.

Local boards and chief executives know that bids are more likely than not going to be received poorly by investors. They are still mainly focused on cutting costs, paying dividends and, if possible, returning cash by way of share buybacks.

Companies have also been maintaining the hurdle rates they impose on potential investments despite the fact that lower interest rates world-wide have significantly cut their cost of capital, and despite the fact uncertainty has declined significantly since the crisis ended.

Australia's meerkat mentality tends to be circular. Job cuts are one of the main ways businesses are cutting costs for example, but employment prospects are also a key driver of consumer confidence. Businesses meanwhile rarely indulge in "build it and they will come" expansion: they want to see consumer demand growing first.

The Coalition has also been a factor. In opposition, it insisted that the economy was a basket-case. In government, it declared that the situation was even worse than it thought, and then devised a budget fix that it was unable to get through the Senate. It's conducting reviews of competition law, the financial system and the tax system that will be worth it eventually, but are additional causes of uncertainty while they are happening.

Still, the Australian dollar has fallen almost 10 per cent in two months, and is now 26 per cent below its 2011 high. Interest rates will stay low in the first half of the year at least and may fall further, and the oil price plunge is cutting transport costs.

All three are pushing up on sentiment and animal spirits as the new year begins, and as Reserve Bank assistant governor Christopher Kent observed in September, animal spirits depend not just on what businesses think about the future, but on what they think their competitors think about the future.

They would bounce when businesses stopped worrying about losses and started worrying about lost market share, Kent said. We will see in the first few months of this year whether low rates, a lower $A and cheaper oil are enough to light the fuse, and give the economy and the markets more mojo.

Malcolm Maiden analyses and comments on business, the markets and the economy.

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