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Trump’s world

At least holidays to the US will be cheap for a while.

It is hard to know where to start with a Trump presidency.

Will he really rip up NAFTA, start building a wall on the Mexican border, toss out ‘illegals’ and block Muslim immigrants?

Or will wiser heads prevail once he grabs the reins of power and the full implications of his various outrageous and incoherent policy announcements become apparent?

The terrifying thing is that no-one knows.

Who knows how a bullying, narcissistic and misogynistic demagogue is going to behave in the White House.

But if he lives up to even a bit of his rhetoric, both the US and the world are in form some very ugly times.

Here’s just a sampling of the changes a Trump presidency may usher in, and how they would affect the world, and Australia.

In line with his much less internationalist view of America’s role, Trump is likely to oversee a reversal of Obama’s pivot to Asia.

Asia Pacific allies like Australia, Japan, South Korea, the Philippines and Thailand will be left to do more of the heavy lifting in regarding regional security. Some might be tempted to move closer to China.

China itself faces great uncertainty.

Trump has indicated he wants to throw up the tariff barriers to Chinese imports. It is a move that will not only impoverish many who voted for him in the first place, by denying them access to the cheap goods that have softened the impact of stagnant wage, but could be very destabilising for the Chinese Government.

Though China has been trying to engineer a change in the economy toward consumption-driven growth, it is still a work in progress, and much of its prosperity is still tied to exports. If Trump was to pull up the shutters on China’s biggest market, the consequences would be dire – not just for China, but also Australia, which depends on Chinese demand for much of its export sales.

If Trump sparks a trade war of the kind that preceded World War Two, when trade barriers went up around the world, the political and economic damage will be huge. The post-war world order that has driven unprecedented prosperity – billions propelled from poverty, disease and malnutrition abating – could be shattered. We would all be the much poorer for it.

The fissures within the US itself that have been exposed by the hate-filled campaign of the last 12 months may widen, instead of narrow, particularly as the fortunes of the have-nots deteriorate further.

Then there is the worry that comes with a nuclear arsenal capable of killing us all many times over being in the hands of one that seems so volatile and unstable.

It is a grim outlook.

But there are at least two threads of hope.

One is that this becomes the high water mark for the craziness that has gripped the world this year. The so-called anti-establishment crowd (who seem very disparate except, maybe to themselves) have had their Brexit, and they have populated the Australian Senate with fringe-dwelling nutters.

But under the pressure of actually trying to do something, and reconciling interests that are increasingly at odds, the coalitions of resentment and anger that have propelled such outcomes may evaporate, and the promises of better times that they sold will be seen as the flimsy soundbites they were.

The second hope is that Europe will cleave to its moderate sensible course and thrive as smart money exits the US and China sees it as an increasingly attractive place for investment.

It may become a salutary lesson for the naysayers in the US and Britain of what they gave up for their collective fit of pique.

In the meantime, can someone please keep Trump away from that button!

 

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Why the gloomsayers are overdoing it

When national leaders talk up how good things are, it is often taken as a sign that they are about to turn very bad.

So when Barack Obama and Malcolm Turnbull each delivered upbeat speeches in the past week, more than a few pessimists probably took them as vindication of their bleak outlook.

After all, there seems to be plenty to be worried about.

The new year has begun in a flood a red ink on global sharemarkets as China growth fears, weak commodity prices, terrorist attacks and natural disasters have all weighed heavily on investor sentiment.

For those determined in their gloom, the latest update on the Chinese economy suggested additional reason for pessimism. The world’s second largest economy expanded at an annual rate of 6.9 per cent in the last three months of 2015, its the slowest pace in 25 years.

Taken together with the decision by the International Monetary Fund to trim its global growth forecasts for 2016 and 2017 by 0.2 of a percentage point each to 3.4 per cent 3.6 per cent respectively, and the bearish mood would seem to be well founded.

But in striking discordantly upbeat messages about the outlook, Messers Obama and Turnbull are not just handing around warm cups of cocoa.

There are concrete reasons to think the gloom is overblown.

Although a sudden upsurge in economic activity appears as likely as a return by Tony Abbott to the Lodge, there are several pointers – local and international – that suggest optimism is not misplaced.

Most importantly, the US economy – still overwhelmingly the largest in the world – appears well established on a growth path.

If the US Federal Reserve’s much-anticipated interest rate increase late last year did not confirm it, a streak of sustained jobs growth that has seen the unemployment rate halve from 10 to 5 per cent ought to allay doubts.

Yes, many jobs have been part-time or casual, and wage growth is weak. And there are headwinds from the weak oil price, which has kicked the stuffing out of the shale gas industry, and the increasing US dollar, which will weigh on export competitiveness.

But cheaper petrol has also boosted real household income, and the American consumer is back shopping and spending, which in turn is encouraging businesses to hire and invest.

As has been widely recognised for some time now, China is engaged is engaged in a highly challenging phase in its economic and political development.

The investment-led growth model that has powered its expansion for the last 25 years has run its course, and left a massive overhang of excess capacity and troubling debt.

If this was not challenge enough, the central government’s reluctance to loosen its control over the economy is coming back to bite it. As The Economist notes, its current situation of a slowing economy, a semi-fixed currency and increasingly porous capital controls is a volatile combination – if the government loosens monetary policy to boost consumption, it will weaken the currency and encourage even more capital to flow offshore.

Still, the Chinese government has plenty of ammunition if recession threatens – $US3 trillion of foreign exchange reserves and ample room to trim interest rates and devalue the yen.

The gloom about Australia’s prospects is also overstated.

The fall in commodity prices has been steep, but so was their rise. As Rod Sims recently pointed out in The Australian Financial Review, the current dominant market narrative of a “collapse” in commodity prices is underpinned by a short-term view. From a historical perspective, they are more accurately depicted as returning toward their long-term average.

Pessimists also point to soft wages growth and a weakening housing market as causes for concern.

But the country is generating sufficient jobs to edge the unemployment rate lower – it fell to 5.8 per cent in December – setting a firmer base under pay rates and raising the prospect of an eventual consumption-boosting lift in household incomes as spare capacity shrinks.

And although capital gains in housing have slowed as some of the heat has gone out of the property market, sentiment toward buying shows signs of picking up.

On the question of whether now was a good time to buy a dwelling, the Westpac-Melbourne Institute Consumer Sentiment Index found a sharp improvement in mood. The index jumped almost 14 per cent this month to 113 points – the highest reading since May last year and only a little below the level of a year ago.

Westpac chief economist Bill Evans says the reading should be treated with some caution, but nevertheless “ma be signalling some improving optimism in the housing market”.

This interpretation is supported by a jump in house price expectations following a plunge in the second half of 2015.

Late last year, Reserve Bank of Australia Governor Glenn Stevens estimated the economy was “roughly half way” through the decline of resources investment, and a rebalancing in the sources of growth was underway – a process that will be greatly aided by the falling currency.

Economic commentary often exudes an unjustified air of certainty.

But the sharemarket’s current bloodletting, but a focus on this has tended to blot out some of the more positive big picture developments occurring.

This is one of those seemingly rare occasions when it may pay to heed the message of political leaders.

 

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Tony Abbott’s world just gets uglier

The ugly position the Abbott Government finds itself in has been underlined by the latest tax revenue and public expenditure figures from the official statistician.
A lot of attention will probably be drawn to the 15 per cent plunge in tax receipts across all levels of government in the September quarter to less than $100 billion.
There is no doubt that tumbling commodity prices and weak wages growth are weighing heavily on the Budget ledger – Deloitte Access Economics reckons the write-downs will push the Budget deficit to $34.7 billion this financial year – $5 billion more than the Government forecast in May.
But the steep 15 per cent fall reported by the Australian Bureau of Statistics today is hardly unexpected – it happens every year at this time. Historically, the three months to September is the weakest quarter for tax collections, for the obvious reason that most corporations settle their annual tax bill in the June quarter.
What is more telling is the ABS’s assessment that Commonwealth spending (ex-defence) grew 2.2 per cent in the September quarter and is up more than a 1 per cent from where it was when the Coalition came to office little more than a year ago.
The Government will probably claim that this is because so many of its Budget savings measures have been stymied by a hostile Senate.
But they should not be let off the hook so easily.
Take the $7 Medicare co-payment proposal, which is languishing on the Government’s books and hasn’t even made it onto Parliament’s agenda yet.
The Government claims it will save $3.5 billion by slicing $5 from Medicare rebates for GP, pathology and diagnostic imaging services. But this money has not been slated to improve the Budget bottom line.
Instead, the revenue was to be directed to the Medical Research Future Fund, to provide a fig leaf for Tony Abbott’s pre-election pledge not to cut spending on health.
Other measures will take years to deliver savings, such as shifting more tertiary tuition costs onto students.
Ripping more than $1.8 billion out of public hospital funding is a significant (if short-sighted) savings measure, but it won’t really have a big impact on the bottom line until 2017-18, while abolishing programs and agencies, such as the Australian National Preventive Health Agency are mostly small beer (scrapping ANPHA will realise just $6.4 million in savings over four years).
Instead, the Government has lumbered itself with a raft of unnecessary costs arising from impulsive and ill-considered decisions affecting the machinery of government.
For instance, the Government reckons that – on paper, at least – abolishing AusAID and absorbing its functions within DFAT will save $397.2 million over four years.
But there are good reasons to question whether the savings will approach anything like that.
First of all, the savings were predicated on staff cuts, and DFAT offered attractive redundancy packages to entice people to leave. As at 30 June, 272 DFAT staff had accepted a voluntary redundancy. Tellingly, a majority (56 per cent) were 50 years or older and 55 per cent were executive level staff – so their payouts would not have been cheap.
Secondly, the entire process was a productivity killer. For months, nothing much was done as management worked out how to takeover would work, and sorted out the structure of the new, larger, organisation.
Third, the process has been a morale killer for many in the Department, further hitting productivity.
You can only wonder whether all these flow-on costs formed part of the calculation when the Budget was being drawn up. I suspect not.
A similar gag-handed decision is to relocate many of the functions of the Department of Agriculture to regional centres dotted across the country.
For an agrarian socialist, it sounds like a neat way of spreading jobs and encouraging economic activity in smaller regional centres.
But reality has a way of mugging such hopes.
There is the cost of breaking the lease on existing premises, locating and securing appropriate accommodation, assisting staff who are willing to relocate and paying out and replacing staff who are not.
Then there’s the increased expense of co-ordinating activities across and geographically dispersed and decentralised organisation – not least higher communication and travel expenses.
Then there is the challenge of luring appropriately skilled and experienced staff to work in these regional offices – not many rural communities will be flush with people experienced in, say, administering a grants program or overseeing research projects.
As the Government struggles to come up with a compelling narrative to pitch its forthcoming Mid-Year Economic and Fiscal Outlook, it will have seen precious few green shoots of hope regarding the Budget books.
As Reserve Bank of Australia Governor Glenn Stevens noted today, it will be “some time yet” before there is a sustained fall in unemployment, so growth in wages (and hence income tax revenue) will be weak for quite a while yet.
And desultory economic growth will not do much for corporate profits or tax receipts either.
If the Government wants to burnish the Budget books and chart a convincing path back to surplus, it will have to contemplate killing more than a few sacred cows, like the massive subsidies currently built into the system for superannuants and hugely expensive corporate tax breaks and handouts.
If Tony Abbott truly thought last May’s Budget was brave, then he and Joe Hockey will have to deliver something of Homeric proportions if they are serious about setting the Budget on a sustainable path.
Otherwise, we’ll just continue to bumble along on familiar our shambolic path of hasty, ill-conceived and partisan Budget decisions and just hope that something – another China, perhaps? – comes along to paper over the glaring inadequacies of the nation’s political class.

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OECD: global recovery is ‘real’ but weak

If you are after economic growth, then there’s really on one place to look – Asia (ex-Japan).

In its latest projections for global and large economy growth, the Organisation for Economic Cooperation and Development has revised down prospects for much of the world.

Australia is one of the few brighter spots in the developed world – the economy is expected to grow by 2.5 per cnet next year, and 3 per cent in 2015.

But the OECD’s outlook is premised on a number of important assumptions, not least that the Abbott Government doesn’t implement any more spending cuts than have already been factored in, and that the Reserve Bank of Australia continues to hold interest rates down.

The OECD’s far-from-buoyant view of the world economy in May has been replaced by an even less optimistic outlook, shaped by a series of disappointing results in some emerging economies and several disturbing developments – not least the ridiculous near-debt default in the US.

Nonetheless, such crazy political brinkmanship to one side, OECD Secretary-General Angel Gurria says the recovery underway in the global economy is “real” – you just might have trouble noticing it much for the next little while.

In figures released overnight, the OECD predicts global growth will accelerate from 2.7 per cent this year to 3.6 per cent in 2014 and 3.9 per cent in 2015.

The picture is even less impressive across the OECD member countries – average growth of 1.2 per cent this year, 2.3 per cent in 2014, and 2.7 per cent in 2015.

The US is expected to do ok – growing by 3.5 per cent by 2015, with unemployment headed down close to 6.1 per cent by December of that year.

But the outlook for the Euro area and Japan remains miserable – growth won’t break above 2 per cent in the former and will be well below 1 per cent in the latter.

Underlining the human tragedy of the deep recession in much of Europe, the Euro area unemployment rate is still expected to be close to 12 per cent by the end of 2015.

The really sobering thought in looking at these projections, is that they rely on so many things going right – not least that politicians in the US, Europe and elsewhere, don’t engage in yet more bouts of indulgent and destructive policies that undermine what financial stability there is or erect further barriers to international trade.

Risks abound.

The big plus for Australia is that China is expected to be one of the few bright spots in the global outlook, sustaining annual growth at or above 7.4 per cent over the next two years despite the deadweight of Europe and Japan.

Reflecting this, the OECD is a bit brighter than the Reserve Bank in its outlook for Australia – expecting that growth in the country will accelerate from 2.5 per cent next year to around 3 per cent in 2015 as activity in the non-mining sectors of the economy “gradually strengthens”.

But, it warns, this is outcome is far from a given.

It has warned the Abbott Government against any further fiscal tightening than has already been planned, and is advising the RBA to maintain its current accommodative monetary policy stance.

On taxation, it backs the business sector’s bid for a lower corporate tax rate.

On housing, it advises a shift to “more efficient” real estate taxation, which is code for the states to abolish stamp duties.

It will be interesting to see if the Government’s Commission of Audit is paying attention.

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Foreign investment set to be early test of an Abbott Government

Two contradictory faces of the Coalition  when it comes to economic issues were on display this morning.

While on a visit to China, WA Premier Colin Barnett called for an end to “discrimination” in Australia’s treatment of investment by Chinese state owned enterprises (SOE).

Simultaneously, the Nationals are pushing for Government to block a $3.4 billion bid for GrainCorp – which handles most grain grown on the eastern seaboard – by US grains giant Archer Daniels Midland. According to the Nationals, the acquisition would not be in the national interest because of the market power ADM would be able to exert. As part of their attack, the Nationals took aim at the Foreign Investment Review Board, accusing it of rubber stamping foreign investment and not protecting “the national interest”.

So, the conservative government in WA says Australia should be more welcoming of foreign investment, while the Nationals at the federal level want tighter controls.

Let’s take these one by one.

First, Colin Barnett’s concern.

The WA Premier is correct that  state owned enterprises seeking to invest in Australia face different rules to other investors. Specifically,  any proposed acquisition by an SOE of an interest in a mining business – regardless of size or country of origin – must be scrutinised by FIRB. This is different to the rules for other categories of investors, who only face FIRB scrutiny if they seek to acquire a stake greater than 15 per cent in a mining business (a threshold currently around $244 million).

But the reason for differential treatment is obvious: a SOE is not your standard investor. Thanks to their state backing, they are not on the same playing field as purely commercial operators, and can have agendas that are not purely commercial, either. So the idea that they face a different form of scrutiny to other investors appears justifiable.

What about the GrainCorp takeover bid?

Interviewed about it by Fran Kelly on ABC’s Radio National this morning, National Senator Fiona Nash said the Nats didn’t trust the ACCC to protect the interests of farmers if, for example, ADM used its virtual monopoly position to exclude some farmers from its network and/or set rapacious fees.  But, if that is the case, aren’t farmers already vulnerable to such abuses from GrainCorp, given its dominance of the eastern seaboard grain handling network? And what is the evidence that the ACCC would be unable to act to ensure a strong market position was not being abused.

Senator Nash, like Nationals leader Warren Truss, has  also attacked FIRB, accusing it of practically rubber stamping foreign acquisitions in the agriculture sector. She said FIRB should include someone with agricultural industry expertise.

The presumption is that someone from an agricultural background would be more likely to reject at least some foreign investment proposals, the implication being that they would have a better understanding of what constitutes the ‘national interest’ than those currently serving on the FIRB.

Following Senator Nash’s logic further, it would mean that each foreign investment proposal should be scrutinised by a group that includes a member with expertise in whatever particular industry is involved. So who would these experts be? How would they be selected? What specifically would they add to the appraisal process? It would seem to be a pretty slippery path the Nationals want the country to go down.

The concerning thing is that, from 14 September, they will have much more clout to try and get their way. Senator Nash has already flagged that they would ask Joe Hockey, if he became Treasurer, to block the ADM bid. This would put him in a very tricky position. On the one hand, he would be under pressure to satisfy the wishes of a key political ally. On the other, what sort of signal would it send to foreign investors about how welcoming the new government was to offshore capital?

Which way he jumps will be an important early test of his judgement, and of the economic and political abilities of an Abbott Government.

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