Its time for animal spirits to return to the boardroom

We could well be at a genuine and critical transition point for the world economy where the “animal spirits” were starting to return to financial markets and were now needed in the boardroom.

That was the view of ANZ’s chief economist Warren Hogan at a recent Australian Institute of Company Directors lunch in Sydney.

Hogan said there had been a tremendous improvement in financial markets over the past six to nine months since the European Central Bank put policy mechanisms in place to bail out sovereign debt markets.

“Markets have since gone from strength to strength,” he said. “My sense of it, having followed financial markets for a long time, is that there has been a real shift over the past two months – the first genuine secular improvement in risk appetite and confidence and if you will, the animal spirits are returning to financial markets. This is something that has been noticeably absent from the Western world since the start of the global financial crisis and the failure of Lehman Brothers. This dynamic is critical for us to take the next step in this recovery phase.”

Hogan said markets were moving ahead of the economy, but for this to be sustained, we needed the improved sentiment and for the animal spirits “to jump into the boardroom” and for corporate investment to lead the way.

“We need the corporate sector to start to invest again because that lack of confidence as a general proposition has really held back the world for the past five years,” he said.

He believed the US economy was generally on a reasonable footing, with its “big end of town” increasingly in great shape, but its small and medium-sized enterprises on their knees, affected by factors like a lack of confidence, the housing sector’s problems, the “fiscal cliff” and shenanigans in Washington DC.

Hogan said the US was the engine of the world economy and if we could get it going, the global economic picture would change.

He did not expect the European Union to break up because there was too much political commitment towards keeping it together. And, while he worried about structural problems in the French economy, he believed the German economy was bouncing back.

He noted that China was able to control its destiny and had a successful self-funded development model. Its long-term ambition to modernise its economy, led by infrastructure spend, would be good for commodity prices. The threats, however, were inflation and that China might not succeed in broadening its economy.

Turning to Australia, Hogan suggested that investment in the mining sector would stop growing this year. “The big challenge for this economy is what we are going to do post that,” he said.

An economy that had positive population growth, as Australia did, needed economic growth to keep unemployment steady, he said.

“We need metropolitan areas to see a pick up in terms of residential and non-residential construction. And, we need the top end of town to start investing.”

Trying to drive growth in this economy via the consumer and consumer borrowings, as done in the past, would be a recipe for disaster, said Hogan.

“We must get business investment to lead the non-mining economy in this next phase for Australia.”

Hogan expected the Australian dollar to remain high and a couple of rate cuts this year. However, he said fiscal policy was creating some uncertainty. “We are not going to get a budget surplus. But we need the Government to still be disciplined and keep the deficit at one per cent of GDP, not two or three per cent. If it starts throwing money into the economy, that would worry the Reserve Bank and investors.”