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By HaleStewart November 13, 2014 7:49 am
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The Lackluster Condition of Australian Business

     Because of the depressed nature of the EU economy, the respective manufacturing and service surveys for the region receive a great deal of attention when they’re released.  In contrast are the Australian numbers, which, because of the more solid position of the Australian economy, fly below the radar.  However, the Australian economy is undergoing a very difficult transition, as it attempts to shift from a resource exporter reliant on heavy raw materials investment, to an economy that is more balanced.  The underlying manufacturing and service sentiment surveys highlight the somewhat skittish nature of Australian business sentiment.

     Let’s start by looking at the three month moving average of the index (the red line above).  Notice first that this indicator has been mostly negative since the end of the recession, only turning positive once in the last five years.  While the overall readings have not been extremely negative – that is, they haven’t reached the depth of the negativity of the recession – they also aren’t encouraging.  Also not the month number (the gray line) has also been positive very rarely as well.

     Above are the index’s components.  Pay particular attention to the gray bars, as these are 12 month averages.  Only the export component is shows expansion, and that just barely so. 

     And finally, above are the 8 lines representing the respective component industry’s level.  Since the end of the recession only food, beverage and tobacco (consumer staple) and wood/paper (wood is a primary component of housing) have printed consistently positive numbers.  Energy was briefly positive last year, but has since retreated to contraction.

     Above are the charts for the service industry.  Like the manufacturing reading, the three month average (red line, top chart) has been negative for most of the expansion.  And the 12 month diffusion index of the sub-components (bottom chart, gray lines) are all showing contraction as well. 

     And while a recent survey of business confidence showed a surprise jump, analysis remain cautious about the sustainability:

Clearly the most surprising feature of the Survey was the sharp jump in business conditions in October (the largest monthly increase in the history of the survey). The improvement driven by sales and profits was relatively broad based –unlike the (short-lived) jump in July. While welcome we remain cautious re the sustainability of the improvement. For example it does not sit well with further falls in business confidence and only marginal improvement in capacity utilisation. While the falling AUD may have helped many sectors, it is probably also behind the large falls in the wholesale and transport/utilities sectors. The jump in conditions also saw employment improve somewhat –consistent with other labour market partials.

     What the above data highlights is just how difficult it is to transition an economy away from one that is export dominated to one that is more internally growth oriented.  Even though the Australian economy is small by comparison to other OECD countries, it's big enough to make a transition extremely difficult.      

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

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