DSI H1:2024: Current conditions tougher, but outlook brighter

This week brought the release of the H1:2024 edition of the AICD's semi-annual survey of member and director opinion, the Director Sentiment Index (DSI). The headline number hasn't moved much this time, with the overall index up only 0.5 index points from the previous DSI. That meant that the index remained firmly in negative territory for a fourth consecutive survey. But a dig into the detail shows that while directors have become gloomier about current economic and business conditions, they have also become more positive about the outlook and have wound back their estimates of the risk of Australia falling into recession over the next 12 months.

Other noteworthy findings from the latest DSI include persistent concerns related to the cost of living, labour shortages and high interest rates and inflation, along with an increased focus on Australia's disappointing productivity performance and the challenges posed by regulation and red tape. In addition, there are signs of renewed unhappiness with some of the settings of tax policy. Housing affordability and supply is currently ranked as the top short-term policy priority for the federal government and the state of the housing market is reportedly having an adverse impact on the businesses and organisations of more than a third of respondents. This edition of the DSI also includes polling on how directors evaluate some of the proposed policy solutions to the challenges posed by the housing market. We delve deeper into a selection of the DSI results below. Meanwhile, many thanks to those readers who were able to find the time to complete what is quite a lengthy survey.

This week also saw some important announcements on the policy front. On Thursday, the Prime Minister gave a speech to the Queensland Media Club outlining a new Australian approach to industry policy in the form of a Future Made in Australia Act. The latter is intended to consolidate new and existing efforts, as well as to signal a response to what the PM described as a new environment of strategic competition marked by 'an increased willingness to make economic interventions on the basis of national interest and national sovereignty.' Earlier, on Wednesday, the Treasurer had presented new rules for mergers as part of the government's ongoing focus on strengthening competition in the economy. The announced changes give an enhanced role to the ACCC via a mandatory notification process and the scope to block deals on the grounds of market power per se (as well as competition) in a shift that will move Australia to a regulator-led rather than court-led merger regime. And back at the start of the week, Treasury released an Interim Report on the Food and Grocery Code of Conduct Review which recommended making the Code mandatory for all supermarkets meeting an inflation-linked annual revenue threshold of $5 billion. See the regular roundup section at the end of this note for more.

On the data front, the past week delivered new updates on household and business confidence. Both the monthly Westpac-Melbourne Institute Sentiment Index and the weekly ANZ-Roy Morgan Consumer Confidence Index confirmed that, as we moved into this month, Australian households remained deeply unhappy with current conditions, squeezed as they are by high inflation and interest rates and an elevated tax take. The ANZ-Roy Morgan survey also highlighted that household inflation expectations have been tracking upwards in recent weeks. Meanwhile, the NAB Business Survey continues to report an ongoing gap between business conditions readings that remain above the series average and business confidence readings that are stuck below their corresponding average. The NAB numbers also described an easing of input and labour cost pressures last month.

A quick reminder about our upcoming webinar: Economic Policy and Budget Update 2024.

And finally, please note that there will be no Weekly update next week, due to travel commitments, but normal service should resume the following week.

Now, onto the detail…

The AICD's Director Sentiment Index edged slightly higher in H1:2024

Results from the AICD's latest Director Sentiment Index (DSI) have been released. The new survey covers H1:2024 and captures the views of more than one thousand members who were polled between 21 February and 11 March this year.

The headline result was a marginal increase in the summary index, which rose by just 0.5 index points from -19.7 in the H2:2023 DSI to -19.2 in the latest survey. This was the fourth consecutive negative DSI reading and the second lowest in the past seven surveys (that is, in those surveys following the deeper lows reached during the pandemic).

Sitting behind that relative stability in the headline index, however, were some interesting shifts in the way that directors assessed current and future economic and business conditions. Compared to the previous H2:2023 DSI, directors have become somewhat gloomier about the current economic and business environment while at the same time turning more positive about the outlook over the next 12 months.

Consistent with that message, directors are also now somewhat less worried about Australia falling into recession within the next 12 months. The share of respondents thinking a recession is a likely outcome has fallen from 42 per cent in the previous DSI to 31 per cent in the latest DSI, while the share thinking a recession is unlikely has risen from 40 per cent to 53 per cent over the same period.

In line with this shift, the share of directors saying that current RBA monetary policy settings are having a negative impact on their business has fallen to 41 per cent from 44 per cent in the previous survey and has retreated significantly from a peak of 52 per cent in the H1:2023 DSI. Similarly, the share of directors thinking that current monetary policy settings will cause a major uptick in business insolvencies fell from 54 per cent last survey to 47 per cent in this survey, after having peaked at 59 per cent in the H1:2023 DSI.

According to the H1:2024 DSI, directors think the five top economics challenges currently facing Australian businesses are the cost of living, labour shortages, productivity growth, inflation and rising interest rates and regulation requirements/red tape. The cost of living has taken the top spot from labour market shortages, although the share of directors nominating the cost of living as a top challenge is down slightly in the current DSI. Also worth noting, the share of respondents citing labour shortages and inflation and rising interest rates as top economic challenges is down more steeply, suggesting that while these issues continue to dominate the economic outlook, the degree of worry has eased somewhat. On the other hand, the share of directors nominating productivity growth and red tape has risen, with the former now considerably higher than its 16 per cent share in H1:2023 and the latter having rebounded from a recent low of just 12 per cent in the H2:2022 DSI in what seems to be a sign of mounting concerns relating to the accumulation of regulations.

Another result worth highlighting here - albeit lower down the rankings - is the increase in the share of directors nominating the taxation system as an economic challenge. That result is echoed elsewhere in the survey, with a marked increase in the share of respondents saying they were dissatisfied with personal taxation settings, up from 54 per cent in the previous DSI to 60 per cent in the current survey. This could be an indication of unhappiness with the recent changes to Stage 3 tax cuts and/or relate to more general concerns about Australia's rising fiscal reliance on personal income tax and bracket creep.

Turning to policy implications, directors rank the top priorities for the federal government in the short term as housing affordability/supply, productivity growth, taxation reform, skills shortages and energy policy. Further down the rankings, there were notable increases in the share of directors nominating defence, industrial relations and regulation of AI.

Regarding the top-ranked item, housing affordability, the DSI asked directors about whether current conditions in the housing market were adversely affecting their organisation and also canvassed opinions about a range of proposed solutions to Australia's housing market challenges.

More than a third of directors reported a negative impact from the housing market, while the most popular solutions involved increases in the availability of affordable housing and increased investment in public and/or social housing, followed by a review of zoning and planning regulations. The least popular measure ranked here was government financial assistance for first home buyers.

In terms of policy priorities for the federal government in the longer term, directors' top five nominations comprised climate change (nominated by 36 per cent of directors), ageing population and productivity growth (each 23 per cent), taxation reform (22 per cent) and housing affordability/supply (20 per cent). Further down the rankings there were notable increases for defence and for education.

Finally, some other result of note included:

• The top issue keeping directors awake at night was cyber-crime/data security (cited by 43 per cent of respondents) followed by legal and regulatory compliance (30 per cent).
• Fifty-six per cent of our respondents disagreed with the statement that 'the federal government understands business' (up from the most recent low of 37 per cent in the H1:2022 DSI) and 54 per cent disagreed with the statement 'I trust the federal government' (up from a recent low of 29 per cent in H1:2022).
• Eighty-eight per cent said global conflicts posed a threat to business supply chains.
• Some 57 per cent of directors reported that compliance and regulation was the main factor affecting their board's risk appetite.
• Nearly half of our respondents (49 per cent) said they would support an emissions trading scheme, while a quarter (25 per cent) were opposed.
• Directors were divided on current migration outcomes: Thirty-six per cent think they should be lower than current levels and 36 per cent think they should be higher.
• The share of directors who think there is a skills shortage in the Australian workforce has fallen from a peak of 83 per cent to 64 per cent in the current DSI, while the share thinking that the implementation of AI and workforce automation could solve current skill shortages stands at 32 per cent.

More results and analysis are available from the Insights Report on the AICD's website.

The Westpac-Melbourne Institute Index of Consumer Sentiment retreated this month

The Westpac-Melbourne Institute Consumer Sentiment Index fell 2.4 per cent in April 2024 to an index reading of 82.4, down from 84.4 in March. That once again left the index stuck below the neutral reading of 100, where it has remained since March 2022. Westpac said this two-year stretch of bleak sentiment readings is comfortably the second most protracted period of deep consumer pessimism (outside of the recession of the early 1990s) since the survey began in the mid-1970s, with all other sentiment troughs lasting just nine months or less. The prolonged nature of this slump reflects the sustained pressure on household incomes from high interest rates, high inflation, and elevated tax payments.

Consumer pessimism was likely magnified by the fact that households aren't anticipating rate cuts any time soon. In fact, according to the Westpac-Melbourne Institute Mortgage Rate Expectations Index, just over 40 per cent of respondents expected further rate increases over the next 12 months, while 24 per cent anticipated no change and only 21 per cent foresaw a rate cut (the balance is 'don't knows').

Household pessimism was also reflected in a sharp decline in the 'time to buy a major item' subindex of the main sentiment Index, with the former falling 6.6 per cent over the month to 78.7. This subindex has averaged 82.1 over the past two years, compared to an historical average of 125, signalling that the squeeze on household incomes is having significant implications for spending intentions.

One bright spot in an otherwise downbeat set of data was a strong reading from the Westpac-Melbourne Institute Unemployment Expectations Index, which fell 2.7 per cent to 124.5. That is below the series' long-run average of 129 and represents the strongest reading since May last year. (A lower index means that more respondents expect unemployment to fall over the year ahead.)

ANZ-Roy Morgan Consumer Confidence also falls in first week of April

Broadly consistent with the message from the monthly Westpac index, the weekly ANZ-Roy Morgan Consumer Confidence Index fell 0.9 points to an index reading of 81.9 for the week ending 7 April 2024. This marked a second consecutive weekly drop and Roy Morgan noted that the index has now spent a record 62 consecutive weeks below a reading of 85, which is 23 weeks longer than during the 1990s recession.

One possible driver of the latest drop was a parallel rise in weekly inflation expectations, which rose 0.1 percentage point to 5.3 per cent. ANZ said this was the first time since November last year (when inflation expectations peaked at 6.8 per cent) that inflation expectations have risen for three consecutive weeks, with higher petrol prices a likely contributor to this trend.

Business conditions, confidence little changed last month

According to the NAB Monthly Business Survey, business conditions fell one point to +9 index points in March 2024, while business confidence rose one point to +1 index point. NAB noted that this pattern of above-average current activity indicators alongside below-average confidence indicators has been a defining feature of the survey for most of the past year, indicating that firms remain concerned about the outlook, even as current economic conditions have remained resilient. This makes for an interest contrast with the DSI results discussed above, which reported something of a deterioration in current conditions, alongside a little more optimism about the outlook.

In terms of the drivers of current business conditions, the NAB survey reported trading conditions (+14) and employment (+6) as both unchanged from February while profitability fell to +6 from +10 index points. Meanwhile, forward orders rose from -3 to -1 index points, while the rate of capacity utilisation eased from 83.4 per cent to 83.2 per cent.

There was some modest good news on cost pressures last month, with labour cost growth easing to 1.6 per cent (in quarterly terms) from two per cent in February, and purchase cost growth slowing to 1.4 per cent from 1.8 per cent. The rate of increase in final products prices also slowed from 1.2 per cent in February to 0.7 per cent in March, while the pace of increase in retail prices moderated from 1.4 per cent to 1.3 per cent.

What else happened on the Australian data front this week?

The ABS' Monthly Business Turnover Indicator reported a 1.1 per cent fall (seasonally adjusted) for the 13-industy aggregate in February 2024. Nine of the 13 industries saw a monthly rise in turnover, one (Wholesale trade) was flat, and three reported falls. The largest fall was in Mining (down 9.6 per cent due largely to falling commodity prices) and the largest rise was in Arts and recreation services (up 4.8 per cent, lifted by sporting events including the Australian Grand Prix). Accommodation and food services also had a good month, with turnover up 3.2 per cent, helped by the boost to accommodation turnover associated with the Taylor Swift concerts in Melbourne and Sydney held that month.

For the week ending 16 March 2024, weekly payroll jobs increased by 0.4 per cent over the month and 1.5 per cent over the year. The monthly rate of growth was down from 2.1 per cent over the previous month, when job numbers had been boosted by the return to work after the summer holidays. According to the ABS, payroll jobs in Education and training again underpinned monthly growth, accounting for around half of the increase.

The ABS said dwelling commencements rose in the December quarter 2023. The number of total dwellings commenced was up 1.3 per cent over the quarter (seasonally adjusted) to 38,397. But that was still down 6.4 per cent from the December quarter last year. Commencements for new private sector houses were up three per cent quarter-on-quarter to 23,597, but 14.9 per cent lower than in Q4:2022. For other private sector residential dwellings, commencements were down 2.7 per cent in quarterly terms to 13,738 but up 11.4 per cent over the year. The ABS also reported that the total number of dwellings completed in the December quarter last year was 29,830. That was up 4.5 per cent over the quarter and 12.3 per cent higher over the year.

According to the ABS, new loan commitments for housing rose 1.5 per cent over the month (seasonally adjusted) and 13.3 per cent over the year in February 2024. Lending to owner-occupiers was up 1.6 per cent over the month and 9.1 per cent over the year, lending to owner-occupier first home buyers was up 4.3 per cent over the month and 20.7 per cent over the year, and the corresponding growth rates for the value of lending to investors were 1.2 per cent and 21.5 per cent, respectively.

Last Friday, the ABS said Australia's trade balance on goods fell by $2.8 billion in February 2024 to $7.3 billion (seasonally adjusted). Exports fell $1 billion (2.2 per cent) over the month, driven by an 8.4 per cent decline in metal ores and minerals, while imports were up $1.8 billion (4.8 per cent), pushed higher by a 15.9 per cent jump in processed industrial supplies.

Also from last week, total building approvals for dwellings fell 1.9 per cent over the month in February 2024 to 12,520 (seasonally adjusted). That was down 5.8 per cent relative to the same month last year. Approvals for private sector houses were up 10.7 per cent month-on-month, but down 1.3 per cent year-on-year, while approvals for private sector dwellings excluding houses slumped 24.9 in monthly terms and 17.2 per cent in annual terms. The ABS said the latter reflected a fall in approvals for large apartment projects. (We did cite this release in the housing story last week but neglected to include it as a separate data release.)

Other things to note . . .

• The Prime Minister gave a speech this week on A future made in Australia. He argued that the current decade 'marks a fundamental shift in the way nations are structuring their economies. A change every bit as significant as the industrial revolution or the information revolution - and more rapid and wide-ranging than both.' In this environment, he proposed, 'strategic competition is now a fact of life' as countries 'invest in their industrial base, their manufacturing capability, and their economic sovereignty' - what the PM describes as 'the new competition'. According to the speech, this new competition is already visible in the forms of the United States' Inflation Reduction and CHIPS Acts, in the EU's European Economic Security Strategy, and in Japan's Economic Security Promotion Act. Given this shift, 'Australia can't sit on the sidelines.' The government's proposed response to all this is to include a 'Future Made in Australia Act' which is intended to pull together new and existing initiatives such as the Hydrogen Headstart program, the SunShot solar manufacturing program and the Critical Minerals Facility.
• Michelle Grattan outlines the government's move to a new interventionist industry policy as set out in the PM's speech.
• From Treasury, the Government's Merger Reform report promises a 'faster, stronger and simpler system for a more competitive economy.' The proposed reforms respond to the government's Competition Review and associated feedback from stakeholders, which the report says found that Australia's current 'ad hoc' merger was 'unfit for a modern economy, lagging best practice in comparable economies.' The changes are intended to streamline the merger approvals process to 'simplify and speed up the process for mergers, consistent with national interest' and to provide the ACCC with 'stronger powers to identify and scrutinise transactions that pose a risk to competition, consumers and the economy.' The new regime will involve:
• A new mandatory and suspensory administrative system for mergers, with all mergers above (yet to be determined) monetary and market share thresholds to be subject to system. This will replace the current voluntary, three pathway system and will involve a shift to administrative decision-making rather than judicial enforcement. That is, the ACCC will now make the decision on mergers rather than the courts.

• Under the new approach, a merger may proceed unless the ACCC 'reasonably believes that the merger would have the effect or be likely to have the effect, of substantially lessening competition in any market, including (but not exclusively) if it creates, strengthens, or entrenches substantial market power.' [This means that the test for blocking a merger could now only require that it leads to more market power, absent a direct finding about the implications for competition.]

• The ACCC will also be able to consider the cumulative effect of mergers by the acquirer or target within the previous three years to protect consumers from the possible impacts of serial acquisitions.

• ACCC determinations will be subject to review by the Australian Competition Tribunal upon applications by the merger parties or third parties with standing. The Tribunal can affirm, set aside, or vary an ACCC determination. The Tribunal will apply the same test as the ACCC and conduct a limited merits review, in that it will be based on the material that was before the ACCC. Judicial review of Tribunal decisions will be available in the Federal Court.
• Interestingly, the government decided not to proceed with the proposal that merger parties need to satisfy the ACCC that a merger is not likely to substantially lessen competition, following stakeholder objections that this would have 'reversed the onus of proof' and effectively introduced a presumptive ban on mergers. The new regime will apply from 1 January 2026 and Treasury will undertake a statutory review of the new system three years after it starts.
• Here is the Treasurer's press release about the changes. And here is the Treasurer's address to the Bannerman Competition Lecture which describes the reforms to Australia's merger regime as part of a broader 'fifth wave' of competition policy, which is itself intended to be one contributor to a wider suite of economic reforms. And here is Rod Sims, currently serving as an expert adviser to Treasury's Competition Task Force and a member of the Export Panel that contributed to the review, on the key changes introduced by the new merger laws. A regulation lawyer writing in the AFR says the changes are likely to impose greater cost and uncertainty on many deals, especially those involving large firms or in concentrated markets.
• Related, the Government has also released an updated Statement of Expectations for the ACCC, which says it expects 'the ACCC to promote a competitive, dynamic and inclusive economy and modern, well-functioning markets that work for consumers'.
• The Interim Report to the Food and Grocery Code of Conduct Review 2023-24. And an opinion piece in the AFR from report lead, Craig Emerson.
• Another piece from the AFR reviews the state of Australia-China economic relations and finds that ties are at their lowest level in more than five years. Chinese investment in Australia has been falling since 2016; Chinese visitor numbers are about half their pre-pandemic levels; and the number of Chinese students in Australia is still below 2019 levels, although numbers did increase last year. That said, the piece also notes that the dollar value of two-way trade is higher now than it was in 2019, thanks mainly to iron ore and gas.
• The Productivity Commission has issued a call for submissions for an upcoming study to assess the economic effects of national competition reforms.
• Two pieces from ABC Business. The first asks if unwinding Australia's two-decades in the making property bubble could have Japan-like implications. The second cites Ken Henry and argues for changes in reporting on budgets and tax.
• New research on negative gearing reckons that the associated efficiency loss is actually pretty small, once some key housing market failures are taken into account.
• Grattan's Tony Wood on How Australia can avoid running out of gas.
• David Uren's new APSI report on the trade routes vital to Australia's economic security.
• The Lowy Interpreter examines the legacy of Daniel Kahneman. See also the Economist magazine's Free Exchange column on Kahneman.
• The IMF has released the thematic chapters from the upcoming April 2024 World Economic Outlook, ahead of publishing the forecast chapter on 16 April. Chapter Two considers the effects of monetary policy through housing markets. Summary blog here. Chapter Three looks at the slowdown in global medium-term growth. Accompanying blog post. And Chapter Four analyses real spillovers from G20 emerging markets. Blog version. Similarly Chapter Two from the IMF Fiscal Monitor - which looks at industry policies - is also available along with a summary blog post version.
• Also from the IMF, a new working paper analyses changing global linkages following Russia's invasion of Ukraine and finds significant declines in trade flows (about 12 per cent) and announced FDI projects (about 20 per cent) between countries in US- and China-centred geopolitical blocs. The authors suggest that the decoupling between rival blocs during the Cold War implies the possibility of much greater declines than seen to date. On the other hand - and different to the Cold War experience - the world economy is now seeing the emergence of a setoff nonaligned 'connector' economies (for example, Mexico and Vietnam) that serve as a bridge between the two blocs.
• On the new Industrial Policy and Competition.
• Measuring housing affordability across countries. Note that figure three shows Australia as having some of the lowest affordability in the sample group.
• The OECD's Anti-Corruption and Integrity Outlook 2024 cautions that a lack of effective monitoring and data collection makes it impossible for countries to know whether their policies and processes actually mitigate corruption risk and improve integrity in practice. For example, only 12 OECD members collect data on whether recommendations by internal auditors are followed by public organisations (Australia isn't one of them) and only nine track what jobs senior office holders take upon leaving public office, potentially exposing them to conflicts of interest (again, Australia isn't one of them, although we do have mandatory cooling off periods for public officials). The authors reckon these shortcomings leave countries vulnerable to corruption risks related to the green transition, the rise of AI, and foreign interference.
• Also from the OECD, a new report on infrastructure for a climate-resilient future.
• An FT Big Read asks, is Japan finally becoming a 'normal' economy?
• New WTO forecasts for world trade project that the volume of world merchandise trade will grow by 2.6 per cent this year and 3.5 per cent in 2025 after having fallen 1.2 per cent in 2023.
• Molly Hickman makes a case for the importance of intuition in forecasting.
• Brad DeLong on large-scale, transcontinental societal cooperation in the classical age.
• And via DeLong's substack, a new economic working paper argues that the discovery of bronze and the ensuing long-distance trade corridors that linked metal mines to fertile lands may have helped trigger the 'Urban Revolution' that saw a transition from simple agrarian villages to complex urban civilisations.
• The Australia in the World Podcast talks to Dr Jenny Gordon about the past, present and future of the international economic order. (Great conversation although, FWIW, I think the early part of the discussion significantly underestimates the importance of the ending of the Cold War/collapse of the Soviet Union as a key driver of the outgoing economic order. For example, absent this, it's hard to see a policy framework that would have been quite so relaxed with the global supply chains, offshoring, outsourcing and deindustrialisation of the advanced economy core that marked the hyper-globalisation era (hence the current panicked moves seeking to unwind some of this stuff); the ideological bump that the utter failure of communism gave to (for want of a better term) neoliberalism was important but also hubris-friendly; similarly, the vanquishing of the main competitor system removed a significant external constraint on capitalism in terms of some of its distributional and other implications; the peace dividend offered a range of advanced economies a seemingly attractive way out of the guns vs butter fiscal bind; the liberation of Central and Eastern Europe allowed a reconfiguration of the location of European industry; and the list goes on.)
• Interesting debate (joust?) between Tyler Cowen and Jonathan Haidt on the links between smart phones, social media, and teen mental health.