Australia | Aug 25 2009
By Chris Shaw
As Commonwealth Bank chief economist Michael Blythe points out, confidence has been a big driver of financial markets since the collapse of Lehman Brothers in September of last year. The lack of it in the aftermath of the global financial crisis saw asset prices sold off heavily, while the improvement in confidence of late has been accompanied by a solid rally.
Business confidence has followed a similar pattern, Blythe noting as Australian business confidence levels fell as the financial crisis unfolded, capital spending plans were put on hold or cancelled, inventories were run down and the hiring of labour was also stopped. The result was business spending was contracting by more than 7% in annualised terms in the second quarter of this year, well down on its annualised growth rates of 15-25% for the three previous years.
As with the global economy, sentiment has now turned for the better in the Australian economy, though as Blythe points out one perceived constraint on the pace of any recovery is the availability of finance. As both borrowers and lenders tend to be more cautious after a downturn, there is a reluctance to act on both sides and this puts a dampener on how quickly the economy can recover.
The global downturn last year was no different as increases to the cost of funds and a general lack of availability impacted on the supply side, while businesses themselves turned their focus to balance sheet repair rather than a desire to borrow for expansion and growth.
But as Blythe notes, the latest data suggest the market’s financial constraints are now easing as evidenced by increases in the likes of commercial finance for motor vehicles, meaning the financing environment for larger companies is now at least stabilising.
Conditions are still not in their favour however, as Blythe suggests financing trends in the broader economy continue to indicate the pressures that are building will favour household deleveraging while limiting the ability of businesses to borrow.
The counter to this is businesses have been dealing with the trend by increasingly turning to equity to repair their balance sheets. Blythe sees this as a good thing in that Australian corporate balance sheets will be in far sounder shape heading into an eventual upturn in economic activity, certainly when compared to companies in other nations.