Consumer and business confidence are insubstantial things, at first glance.   You can’t see them or touch them.  Yet they are vital to the performance of the economy.  If consumer confidence is weak, consumer spending will be sluggish and investment in housing will struggle.  If business confidence is weak, fixed investment will also be weak, and businesses will be reluctant to hire new staff and increase employee remuneration.   And so, there may be a feedback process where lack of confidence causes the economy to underperform which in turn leads to further declines in confidence.

After the budget, consumer confidence declined sharply.  As is usual, the initial sharp drop in consumer confidence was subsequently partially reversed.  Often there will be a sharp downward spike which improves as people become used to the idea of projected new tax rates and government spending declines.   In this case, some of the rebound was no doubt due to the Government’s likely inability to get all its measures through a hostile Senate, which would mean that the budget would not in fact be as severe as it was initially presented.

However, consumer confidence (as measured by the Roy Morgan/ANZ survey) has not recovered back to its previous lows, never mind its previous highs. This is concerning, because as the mining boom fades,  the impact of declining fixed investment in mining and mining related infrastructure could take 5 percentage points off GDP over the next couple of years.  It was hoped that consumer spending and housing would pick up the slack.

The RBA is forecasting a modest rise in the unemployment rate over the next year, to 6.25%.  Wage increases (2.6% year-on-year in QI) are the lowest they’ve been since then last big recession in 2000, lower even than they were during the GFC, and lower than the inflation rate.  If you combine sluggish wages with poor confidence, the likelihood of a consumer-led upturn seems low.  At the same time, the A$ is stubbornly high, reducing the competitiveness of Australian industry and services, as we have seen with the car industry.

The volume of mining exports will boom, as the infrastructure to extract and export our minerals is completed, which increases real (i.e., price-adjusted) GDP.  In fact, most of the growth in real GDP (Gross Domestic Product) in Q1 came from mining exports, but GDE (Gross Domestic Expenditure) was weak.   Real GDE is pretty much where it was 18 months or more ago, and actually fell in QI.  Extracting and shipping minerals will involve less labour than building the infrastructure to do these things did.   And many of the mines are owned by foreigners, so even the profits  will tend to flow abroad.   At the same time, the prices of our major mineral exports (coal and iron) have fallen as China slows.

All this means that Australia is likely to underperform world economies over the next few years.  The mining boom is well and truly over.  And confidence will go on struggling.