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Five reasons to be cheerful about the economy

Thursday, 14 February 2013 | By Yolanda Redrup

Economic news has been largely doom and gloom over the past few years, but there are five reasons the Australian economy is moving toward happier days.


SME profits are on the rise, unemployment figures are steady and consumer confidence is on the up, collectively spelling good times in the future for Australian businesses.


SmartCompany consulted with chief economist and head of investment strategy at AMP Capital Investors, Shane Oliver, and looked into the key signs the economy is doing better.


1. SME profits increasing


Australian SMEs are performing well with 54% posting profit increases in the six months to December.


The findings released yesterday by the Entrepreneurs' Organisation reflected overall positivity among Australian SMEs in terms of market sentiment and net profits.


The survey indicated 82% of Australian EO members expected an increase in revenue growth in the next six months and 76% predicted an increase in net profits.


Oliver says the economic health of SMEs is vital to the Australian economy.


"SMEs are always important because that's where the jobs and the growth and the profit increases come from.


"SMEs are the lifeblood of the economy. We were given a huge boost from the mining boom, but now it's ending the focus will be back on the SMEs to drive the economy in the future," he says.


Oliver says the profitability of SMEs and the recent survey have helped boost consumer confidence.


2. Consumer confidence rising


The Westpac consumer confidence survey released yesterday showed the biggest jump in consumer confidence since September 2011.


The February Westpac-Melbourne Institute consumer sentiment index shows confidence is up 7.7 points to a 108.3, its highest level in 26 months.


The biggest boost came from people aged 18-24, whose sentiment increased 32% on the index and sales and clerical staff also increased by the same amount.


Oliver says the rise in consumer confidence is influenced by a range of factors.


"I think it's a combination of things, the economic impact from the European crisis (particularly in Spain and Italy) is fading and consumers are hearing more positive stories about China and the US and so the negativity is being removed.


"They've also noticed the size of the sharemarket increasing and the housing market is also doing well, adding to an increased feeling of household wellbeing.


"Lower interest rates over the past year have also contributed to this confidence. The older demographics living in the suburbs with a mortgage have had a huge boost from the low interest rates, so their finances are looking better," he says.


3. Sharemarket above 5,000


For the first time in three years, the sharemarket closed above 5,000 last night, following strong profits from the Commonwealth Bank.


CBA shares jumped 2.4% to $67.11 and triggered an overall rise in the financial sector with Westpac increasing 2.1% to $28.33, NAB up 1.2% to $29.29 and ANZ up 0.9% to $27.81.


The market has been steadily moving toward the 5,000 mark for the past few months with the market generally performing well or remaining steady on a daily basis.


Oliver says people should look to the market as a reliable indicator of the economy.


"The sharemarket is historically a good indicator for the economy. The fact that it's turned upward over the past year is a sign growth will pick up and this has been reflected in some companies' results too," he says.


4. Retail results improving


A little bit of welcome news goes a long way in the retail world, with JB Hi-Fi's shares increasing in value by 13% earlier in the week after they posted an increase in net profits.


The retailer's profits increased by 3% to $82.1 million in the six months to December and since the start of the year their shares have increased by around 21%.


Noni B posted a profit of $2.4 million dollars this time last year which inspired a 37% jump in their share price and despite dropping to a $1.9 million profit in the first half of this financial year, directors believe they will trade well in the second half of the year.


High-end retailers have continued to perform well, with Burberry achieving a 15% jump in sales in the Asia-Pacific region for the December quarter and Australian brand Oroton continuing to do well.


Oliver says retailers which are struggling can expect spending to start to "pick up" toward the end of the year.


"I think all these indicators are consistent with a turn for the better for the Australian economy. We may have a rough patch over the next six months because it can take a while for spending to pick up, but by the year's end it will be positive," he says.


5. Unemployment rate steady


Australian unemployment figures have remained steady at 5.4% in January, according to the Australian Bureau of Statistics.


Unemployment rates have been recorded since 1978 and the average rate has been 6.97%, making current figures below the 35-year average.


The highest unemployment rate was in December 1992 when 10.9% of people were unemployed.


But Oliver says unemployment rates don't always accurately reflect the economy.


"The unemployment rate has stayed reasonably low, but of all the indicators it's probably the least reliable," he says.


Oliver says fewer people are looking for jobs than before and these people aren't accounted for in the unemployment figures.


"There has been a fall in the participation rate which isn't accounted for in the figures, job seekers have given up looking for jobs.


"The participation rates indicate the size of the labour force relative to population has declined. If the participation rate had stayed where it was in 2011, then the unemployment rate would be about 6% now. Unemployment is always one of the last things to improve," he says.


This story first appeared on SmartCompany.