Tuesday, January 05, 2016
The 2016 Australian outlook
In the three days since I wrote Saturday Morning Musings - the 2016 global outlook, the execution of the Saudi cleric Nimr al-Nimr and the subsequent breakdown of diplomatic relations between Saudi Arabia and Iran has further complicated the position in the Middle East. At the same time, the European migration crisis has led Denmark to impose temporary border controls on travelers from Germany. This followed the imposition by Sweden of temporary border controls between Sweden and Denmark, a move that directly affected (among other things) commuter traffic in the greater Copenhagen area. This extends into Sweden. Finally, release of the latest Caixin/Markit China Manufacturing Purchasing Managers' Index (PMI) suggests that Chinese manufacturing output is continuing to slow.
I am not sure that any of this affects the conclusions I reached in my outlook piece, but they are useful reminders of the dynamics affecting the 2016 global outlook.
Turning now to the Australian outlook for 2016, there will be elections this year in the Northern Territory (27 August), the Australian Capital Territory (15 October 2016) and, most importantly, at national level.
The timing and form of the Federal election is still uncertain. The Prime Minister previously indicated October as the most likely date, but political events may lead him to call an earlier poll. This piece by the ABC's Antony Green outlines the choices open to Mr Turnbull.
I will talk further about elections and election issues in a moment. Within all those prospective issues there is one central issue, the economy. That will finally determine just what happens over 2016. I say that partly because the differences between Labor and Coalition are differences at the margin, partly because economic events will determine what the Australian Government can finally do.
The graph shows movements in commodity prices on which the value of Australian exports is so dependent. The mining investment boom that flowed from the price rises has ended. The mining export boom flowing from the additional investment is underway in volume terms, but its value has been constrained by declining commodity prices, a decline partly offset in domestic terms by a fall in the value of the Australian dollar that has increased returns in Australian dollar terms.
The fall in the value of the Australian dollar has eased the adjustment process flowing from the decline and then end of the mining investment boom. This was a most unusual boom by Australian standards, for it was not followed by a recession as conventionally measured. However, it was followed by an income recession with real incomes falling. This aided adjustment and the maintenance of employment, but also adversely affected Australian Government revenues, increasing the deficit.
The global economic outlook is clouded, with economic growth slowing. Middle East turmoil does not help this. Slower growth in Asia in general and China in particular reduces demand for Australian products. Aided by the low dollar, Australian manufacturing is finally expanding if from a low base.However, growth in the services sector that had supported adjustment appears to have stalled. The most likely scenario for 2016 is slow growth with continuing declines in Australian real incomes.
The income outlook severely constrains the Commonwealth Government's freedom to move, constraints accentuated by the way it has set stated budget parameters. The Opposition has a little more freedom, but it too is locked into specific budget constraints. Because neither side has much room to move, policy debate will focus on those areas at the margin where there is some apparent room to do things or, alternatively, not. This makes industrial relations, tax and micro-economic reform key battle areas.
Three weeks ago I would have said that Mr Shorten's position was terminal. I expected him to be replaced closer to the election by someone who might minimise losses. Just as Mr Abbott's greatest advantage as Opposition Leader was Labor dysfunction, so Mr Shorten's was Liberal dysfunction. Mr Turnbull turned that around,.but then the wheels came off.
I don't have time this morning to trace either the Mal Brough or Jamie Brigg's matters including Minister Dutton's SMS in a way that would make sense to a person outside Australia. Prime Minister Turnbull has finally been forced to intervene. The whole thing bears a striking resemblance to the way in which first Mr Rudd then Ms Gillard, then Mr Rudd and then Mr Abbott were brought down by an accumulating series of previous political errors.
From a purely personal viewpoint, I found both the Jamie Briggs and later Dutton matters quite distasteful. Just focusing on Mr Dutton, you don't have to get into the question of what is or is not sexist to find the language and attitude displayed distressing. It was, or so it seemed to me, both rude and nasty. It left me with the thought that I don't want that man making decisions that affect me or the people I care about. I just don't trust his judgement or his fairness. That is, I think, the real issue, for I don't think that I'm alone in my feelings.