There is one lesson Australian investors should take from the weekend’s G20. It’s not the obvious one that talk shops of this nature always disappoint. Nor is it in the expectation of any lift in prospective growth for the world given that all of the agreed initiatives are actually already known domestic agendas reshaped and rubber stamped at the forum. It’s certainly not in the spurious gains of FTAs.
It’s not even that the world has made a paradigm shift towards greater action on climate change, given the most obvious impact of that – the long term destruction of the Australian coal sector – is already locked in and well understood.
The lesson is this: The Abbott Government is not up to the job and that has very important and near term consequences for Australian asset classes.
Some of you will bridle at this. Australians tend to treat politics like the support of a football team, with a tribal commitment that overlooks performance, but I caution you to read on. The above statement is neither partisan nor dependent upon whether you agree that global warming is real or not. It is simply true in any objective assessment of the summit.
The two defining moments of the summit were the respective speeches of President Barack Obama and Prime Minister Abbott. In the first, a big picture and bold strategic plan was laid out for the next two decades, largely revolving around addressing climate change and the rise of China via the strategic pivot to Asia. The second – variously described as “weird’’, “graceless’’ and “inappropriate” – delivered in front of world leaders, focused entirely upon domestic politics, bureaucratic holdups in the senate and a failing agenda (you can see some of it here).
This should tell you two things about the Abbott Government:
- first, its judgement on matters of political economy is sorely lacking, and
- second, it does not know it.
In normal times this would not matter and Australia’s famous good luck would carry the day. But this devilish combination of a lack of policy insight and a tin ear will add to the Australian economy’s woes in the two years before the next election.
Remember, what is bearing down upon the economy is a combination of six shocks and headwinds:
- The mining and manufacturing capex cliffs will accelerate next year and run through 2017 ensuring that the labour market continues to loosen throughout.
- The second headwind is the terms of trade crash on the back of the iron ore price, which is going to get worse throughout next year and will eventually hit major mining company share prices hard. The Australian energy sector is being drawn into that now as well as the LNG price also crashes. Both ensure there are no gains ahead in the stock market, as well as hitting the federal budget for six.
- The third headwind is the consumer who is under major income pressures and despite rising housing wealth is not loosening the purse strings. The two points in number 2 ensure that will continue.
- The fourth headwind is that the housing bubble has blown off too quickly and too early. The result is a clear shift towards macroprudentiual tightening in APRA aimed at the investor mania. Most Australian cities have soft housing markets. Sydney is out of control and Melbourne fast but slowing and fundamentally weak. Constraining the marginal buyer is going to hit this already lopsided and vulnerable market, entrenching number 3.
- The fifth headwind is the Australian dollar. It is falling and will keep doing so but nowhere near fast enough to boost the economy. 75 cents next year seems fair. 65 cents the year after. But it is being paced very slowly against US tightening and local inflation, not the medium term needs of the economy.
To these five headwinds we can add the lesson of the G20, that the Abbott Government is inept, which will prove costly.
To understand why, remember that the above five challenges amount to the structural adjustment for the post-mining boom Australian economy in which it must improve its competitiveness. The Abbott Government has shown zero awareness of theses conditions. What is needed for the best case outcome is:
- a huge push towards productivity growth including finely assessed infrastructure investment;
- major tax reform directed at the same;
- budget management that explicitly folds the nation into a project of mutual sacrifice, and
- policies aimed at delivering a lower dollar faster, and a very big real depreciation that contains wages.
Instead we have:
- infrastructure pork and virtually no broader productivity based reform;
- tax reform aimed at supporting failing industries and suppressing rising industries;
- class warfare in the budget cuts, and
- policies aimed at keeping the dollar higher, as well as labour market wage constraints via a coolie invasion that is already tearing the social fabric.
Coming into government, the Hockey agenda of ending entitlement and the more general ambition of driving for surplus was the right one and got a ringing endorsement here at MB. However, that has proven not to be part of any understanding of the need to improve competitiveness post mining boom, but rather is the spawn of a whacky fusion of trickle down ideology, political favours and misplaced mining boom faith. Where the agenda does cross what is appropriate for the times it is more owing to good luck.
In short, post G20 investors should now be factoring in mass Government ineptitude as a sixth headwind. We’ve already seen the major damage caused by a foolish budget and Abbott’s and Hockey’s performance is still bad enough to think that there will be no swing in the dire polls that have dogged the two since they were elected:
That means that more leadership instability is likely and a change of leader very possible in the next eighteen months as the economic challenges mount ever higher.
2015 is shaping as a real doozy for the Australian political economy. Prepare accordingly.