Economics | Sep 15 2015
By Greg Peel
The initial financial market response yesterday to the news a spill was on, and subsequently that Australia had a new prime minister, was a jump in the Aussie dollar to over US71c, and this morning the currency has pushed a little higher still.
It then remained to be seen how Australia’s stock market – the primary reflection of the economy’s perceived trajectory – would respond. The futures market closed this morning suggesting a 29 point fall for the ASX200 and as I write, that prediction is playing out. However, with commodity prices all tumbling overnight thanks to slightly weak Chinese industrial production numbers (base metals down 2-4%, iron ore down 2%, Brent crude down 3%) and Wall Street closing lower ahead of this week’s Fed meeting, extracting the Turnbull factor from the macro is not clear cut.
Initial commentary from market analysts is nevertheless unanimously positive.
To start with, Citi believes Malcolm Turnbull’s former career as a successful investment banker and corporate lawyer should be viewed positively by investors. None of Rudd, Gillard or Abbott had any experience in financial markets. (Nor, it should be noted, had Howard, Keating, Hawke, Fraser or Whitlam other than politically, and once we get to McMahon and beyond I’m not sure.) A change in treasurer should also be viewed positively given Joe Hockey delivered two poorly received budgets and was perceived to be unable to “read” the economy, in Citi’s view.
The lack of economic and fiscal direction under Abbott/Hockey for a number of months have weighed on Australian business and consumer sentiment, Citi contends, even if the macro picture may have been cause enough. Turnbull’s narrative of engaging in informed economic debate rather than catch phrases provides some hope, the analysts believe, that previously forgotten enquiries into potential growth mechanisms for the country (productivity, supply-side reform) could now receive some attention.
Consumer sentiment should also be improved by Turnbull’s more moderate stance on popular electoral topics such as climate change and gay marriage than Abbott’s ultra-conservative views.
Uncertainty remains the greatest enemy of financial markets, and Citi believes the Turnbull victory removes uncertainty. Had Abbott won, he would likely have gone to an early election (double dissolution) to break the parliamentary impasse. Turnbull is likely to see out the term.
Turnbull faces slowing economic growth, an electorate disillusioned by government and relatively high unemployment, Citi notes. He will now need to engage with the business community and deliver a plan to turn things around, while as a social progressive, he will have to do so while still appeasing the more conservative cohort within the coalition.
AMP’s Shane Oliver is also quick to point out that a shift to Turnbull does nothing to change the reality of the end of the resources boom and soft economic growth, which he sees as having played a role in driving political instability. But he does believe the change in leadership has the potential to help Australia.
Oliver concurs that Turnbull’s popularity amongst Labor and swinging voters is likely to promote greater consumer confidence. Turnbull is likely to focus more on articulating the challenges Australia faces, proposing reforms to address them and then reaching out to independents and political opponents in Parliament to offer compromises to help ensure that they are passed into law, Oliver contends. This is likely to include getting the budget back under control, reforming Australia’s tax system and reducing bureaucracy. The commitment to free market economic policies, including free trade deals, is likely to remain.
To articulate Australia’s economic challenges and propose reforms designed to address them is exactly what Australia needs now and has been lacking over the last few years, Oliver believes.
RBC Capital Markets’ money market analyst Su-Lin Ong also concurs with the general view of improvement to confidence and takes this further to suggest sustained improvement in business confidence should reduce the odds of the RBA needing to ease further.
It is no secret Glenn Stevens has been frustrated that the central bank’s monetary efforts to overcome macro challenges and restart Australia’s non-mining economy have at best been unsupported and at worst been countered by the fiscal policy approach of Abbott/Hockey, even if the governor’s rhetoric has been politely reserved.
Morgan Stanley is “cautiously optimistic” the change in leadership offers greater prospects for fiscal reform. The investment bank has gone as far as to offer Malcolm Turnbull a few tips on what he needs to do.
The first is reboot the “infrastructure initiative”. Abbott once promised cranes as far as the horizon but not only has delivery fallen well short of expectations, public spending actually declined in FY15 outside of lumpy defence outlays at a time declining resource sector capex has needed a counter (See: Stevens’ frustration). Morgan Stanley believes clarity and vision is critical with regard government infrastructure spending and with Australia’s debt at 14% of GDP, there is plenty of scope to inject up to $80bn of stimulus without losing the country’s AAA-rating.
In other words, can the new government please shake off the destructive obsession of previous governments on both sides to return the budget to surplus as quickly as possible at a time money has never been so cheap and Australia’s debt to GDP ratio is amongst the lowest on the planet. Surely job creation and economic growth are greater drivers of voter confidence than constant fear-mongering over debt and deficits, the true understanding of which is beyond many a voter. (My view)
Morgan Stanley further believes the new government needs to foster productivity and innovation. So far the resource sector decline has been offset to a large extent by the housing boom, which is now being reined in by stricter macro-prudential controls. The focus on government to unlock productivity through reforms has increased.
Finally there’s the ever present subject of tax reform. Morgan Stanley believes Australia’s tax system can be made more efficient and the distortions it currently creates can be mitigated. One starting point would be to reintroduce for consideration areas of tax policy that have previously been ruled untouchable, the analysts suggest, such as negative gearing and superannuation.
Finally – and this my own humble opinion – Malcom Turnbull should swear on a stack of whatever it is he believes in that he will never qualify every statement he makes with a reference to the previous (Labor) government and that he will not denigrate opposition policy as a matter of course simply because it is opposition policy.
Do that, and he will go a long way into riding into the position of prime minister-elect next year on a golden chariot. It’s all voters want to see.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
