Malcolm Turnbull’s central pitch for the prime ministership was his capacity to prosecute the case for economic leadership. It’s the standard by which he and his new treasurer will be judged. But while the business establishment, especially in Sydney, is enthused by his ascension to the leadership, the reality is that he and his government will be as much a hostage to outside events as Tony Abbott and his government was — and we’re going to see that within 24 hours.
The US Federal Reserve has begun a two-day meeting, with markets, economists and the commentariat split on whether it will lift interest rates for the first time since 2006. This decision will be the big economic event of the early days of Turnbull’s prime ministership, illustrating the impotence of Australia and other smaller economies in the face of decisions made elsewhere. Even if the Fed doesn’t move, the fallout from that decision will hit Australia. And the weakening pace of activity in China will have to be watched closely because it will confirm that our dependence on that country will impact the performance of our economy and the fortunes of the Turnbull government.
Overnight, the Organisation for Economic Co-operation and Development (OECD) cut its 2015 global growth forecast to 3% (the lowest in six years) from 3.1% in June and its 2016 forecast to 3.6% from 3.8%. And it now expects Chinese growth to slow to 6.7% this year and 6.5% next year after 7.3% in 2014 — all underlining the global challenges to Australia, especially from a wobbly China (as the minutes from the Reserve Bank’s September board meeting made clear with extensive discussion about China’s current health).
The big domestic question is the pace of the economy’s transition from the disruption of the biggest investment boom in our history to the uncertainty and sluggishness of a return to a more tradition growth pattern. While the June quarter’s 0.2% growth is unlikely to be a sign of things to come (although commodities-dependent New Zealand, which today recorded 0.4% growth in the June quarter, below expectations and little improved from March’s 0.2%), the Reserve Bank has been keen to explain its view that growth could be lower than expected in coming years. In the RBA’s view, our potential growth rate is reset by an ageing population, lower migration and the impact of the property boomlets in Melbourne and Sydney’s bubble, which is now slowing as clearance rates continue to fall. There’s no recession around the corner, but a lower-growth environment may well be.
The removal of Abbott and Hockey will help the overall malaise undermining both business and consumer sentiment, and perhaps even conjure some of those “animal spirits” Reserve Bank deputy governor Phil Lowe said were needed to get the economy moving. Turnbull’s narrative — and yes it’s early days — is to stress the opportunities of the new, disruptive global economy for Australia, and the need to seize them, which marks a different tack from Abbott and Hockey, who continued relentlessly talking down the economy and lamenting the mess they’d been left by Labor for many months into their own time in office, before becoming almost Pollyannaish in their last days. But there’s only so much positivity political leaders can provide for an economy: their words must be accompanied by actions.
Turnbull’s first opportunity is coming up: Treasury will already be working on the mid year economic update (MYEFO) due by December. Using this sort of set-piece effectively will be crucial to how effective Turnbull is in getting his economic messages through. MYEFO should be used as the opportunity for a mini-budget — not merely to give a clear idea of the Turnbull government’s fiscal strategy, but to signal to voters and business Turnbull and his treasurer’s policies, priorities and direction. With an election year looming, it could also be used to prioritise budget repair ahead of 2016 budget in May that for political reasons can’t be too hardline. Hockey and Abbott were starting the paint themselves into a corner on tax cuts. They should be abandoned — it sends a bizarre signal to voters that it’s time for tax cuts while the budget remains mired in red ink — and a medium-term budget repair strategy should be put front and centre before voters, one that charts a return to surplus while maintaining enough stimulus to help monetary policy do the job it has been doing for years in supporting the economy.
And there are plenty of positives for Turnbull: he might do well to recognise that the flexibility of the Fair Work Act — which Turnbull as then-leader savaged as harming jobs when Julia Gillard introduced it in 2009 — is helping cushion the economy, productivity is better than admitted by business, government and many policymakers, business profits are solid and underlying demand is good, as evidenced by continuing strong car sales, the best business conditions since 2009, according to the recent NAB survey, and the positive impact of the continuing home building boom. The lower value of the dollar is starting to stimulate the economy, and should start generating more tax revenues for Canberra as well.
Tomorrow, Reserve Bank governor Glenn Stevens will make a scheduled appearance before the House of Representatives Economics Committee. He’ll provide a good overview and understanding of the economy in the wake of the Fed decision — one that will be crucial reading for the new leader and his incoming treasurer.
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