Box C: The Recovery in Confidence
The contraction in the global economy late last year and earlier this year was characterised
by a sharp increase in risk aversion and a collapse in business and consumer confidence. Risk
premia in financial markets rose markedly and firms and households delayed their spending
plans – particularly for capital and durable goods – as they became more cautious. Recently, the
extreme risk aversion evident earlier in the year has abated and there has been some recovery in
business and household confidence around the world.
Graph C1
Sentiment Indicators
Deviation from long-run average
Std
dev
Std
dev
Consumer sentiment
2
2
0
0
-2
-2
Selected major economies**
Australia*
%
%
Business confidence
15
15
0
0
-15
-15
-30
-30
-45
1989
1993
*
1997
2001
2005
-45
2009
Average of Roy Morgan Consumer Confidence Rating and WestpacMelbourne Institute Consumer Sentiment Index
** GDP-weighted average of euro area, Japan, UK and US
Sources: IMF; Melbourne Institute and Westpac; NAB; RBA; Roy Morgan
Research; Thomson Reuters
Graph C2
Consumer Sentiment
Long-run average = 100
Index
Economic conditions over the next five years
140
120
120
100
100
80
80
Index
Index
Unemployment expectations
150
150
125
125
100
100
75
75
50
1979
1985
1991
1997
Sources: Melbourne Institute and Westpac; RBA
44
Index
140
R e s e r v e
b a n k
o f
A u s t r a l i a
2003
50
2009
These trends have also been
evident in Australia, although
confidence did not fall to levels
as low as in many other countries
and the rebound has been much
sharper
(Graph
C1).
While
indices of consumer sentiment fell
considerably through 2008, they
remained less negative in Australia
than in the early 1990s recession
and have since recovered to nearrecord levels. The improvement in
sentiment is particularly evident in
the forward-looking measures, with
more individuals reporting that they
are optimistic about medium-term
prospects for the economy than has
been the case since the consumer
sentiment survey commenced in 1973
(Graph C2). There has also been a
marked reduction in households’
concerns about unemployment;
earlier this year, reported concerns
about unemployment were at
their highest level for more than
three decades.
Measures of business confidence
also declined markedly last year,
particularly around the global
financial
market
turmoil
in
September. They have, however, risen
since the beginning of the year. For Australia, the NAB survey measure of business confidence
is around its highest level since 2003, while measures in other business surveys have also risen
over recent quarters, to be well above long-run averages. The rise in confidence has been seen
across all industries and states.
In comparison with the significant pick-up in measures of business confidence, measures
of current conditions for firms have shown a less marked rise, with most surveys reporting
that current conditions are around or only slightly above average. Similarly, despite the high
reported level of confidence, firms’ stated investment intentions over the coming year remain
below average (Graph C3). The difference in measures of confidence and current conditions is
also evident in the consumer surveys; while their level of confidence is high, when consumers
are asked about current buying conditions for major household items, their responses are only
just above average.
Interpreting the recent rise in
Graph C3
confidence is complicated by a lack
Investment
and
Consumption Intentions
of historical precedents for such large
%
%
Investment intentions*
swings in business and consumer
20
20
confidence over a short period of
0
0
time. Earlier research by the Bank
found that sentiment measures in
-20
-20
Australia have some predictive
Index
Index
Buying conditions for major household items**
content in regard to the future level
120
120
of economic activity and that they
100
100
can provide useful information
80
80
about current conditions, especially
60
60
since they are available on a timelier
40
40
2009
1989
1993
1997
2001
2005
basis than some other measures of
* Net balance; deviation from long-run average
** Long-run average = 100
activity.1 However, there have been
Sources: Melbourne Institute and Westpac; NAB
earlier episodes – most obviously
the sharp fall in business confidence
following the terrorist attacks in the United States in September 2001 – when large swings in
confidence were not closely linked to subsequent developments in the economy. To some extent
the recent recovery in confidence may partly reflect a sense of relief that the very bad outcomes
thought possible earlier in the year have not materialised, with the Australian economy in
particular performing better than was widely expected. If so, the recent sharp rise in confidence
may not translate fully into future household and business spending. R
1 See Roberts I and J Simon (2001), ‘What Do Sentiment Surveys Measure?’, RBA Research Discussion Paper No 2001-09 and
Aylmer C and T Gill (2003), ‘Business Surveys and Economic Activity’, RBA Research Discussion Paper No 2003-01.
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M o n e t a r y
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