Economic Outlook

At a time when in January the IMF revised down its global GDP forecast for 2016 from 3.6% to 3.4%, and also forecast a fall of 9.5% in non-oil commodity prices (after a fall of 17.4% last year), Treasurer Scott Morrison is justified in repeating his boast that today’s December quarter GDP increase of 0.6% (seasonally adjusted) shows Australia is continuing to grow well above the average  in the OECD. In fact, the trend in GDP growth has edged up slightly since 2013.

He is also correct in justifying his opposition (with apparently that of his German counterpart) at last weekend’s meeting of the G20 to the IMF’s call for another round of stimulus. The report in the AFR below quotes him as rejecting that as  “short-term measures designed merely to bring forward demand …were not a substitute for implementing the necessary structural reforms”.  Note also the comment made by Treasury Secretary Fraser (see Treasury Head on Short Term stimulus)

“Challenging governments at both the state and federal level to back the right projects, Mr Fraser said it would be wrong to rely on such spending as a “source of short-term stimulus for the economy. “While conceptually appealing, especially when the cost of borrowing is relatively low, the scope for fast-acting infrastructure projects to provide short-term fiscal stimulus is very limited,” he said in a speech to infrastructure investors published by Treasury on Monday. “The ideal fiscal stimulus is one that leads to rapid and broad-based increases in demand in order to soak up space capacity.”

But with the annual rate of growth still running at only about 2.5% pa the Turnbull Government urgently needs to get its own structural reforms started instead of dithering. The measure of success should not be that we are doing better than an OECD average that is pulled down by European countries whose economic policies leave much to be desired. Relevant is last night’s 7.30 report interview with John Howard who made one feel “if only we could have him back”. Of course, it is easy for an ex-PM to comment now but his remarks sent a message to “get going” with reforms, viz

“Now, what Malcolm Turnbull decides to do at the next election is a matter for him, but we mustn’t lose sight of the need for going back to taxation reform. And of course – you mentioned it briefly – at some point this country has to return to industrial relations reform. The problem with the Australian economy at the moment is that it’s very sluggish on the supply side. We need more activity in areas of competition. We need to revisit industrial relations reform. We do, of course, need to do things on tax reform”.

A close look at today’s National Accounts also reveals warning signals  that threaten a slow-down in growth unless reforms are started. In particular, the fall in private business investment in the non-mining sectors compared with last year accompanied by a continued downward trend in the profit share, and the further fall in the terms of trade, do not bode well for private enterprises.  Also, while private expenditure on consumption has held up well, the fall in national disposable income (GDP adjusted to allow for the drop in the terms  of trade) means that consumers are relying to an increased extent on drawing down savings, the returns on which are declining.  Indeed, the sharp decline in yields on  government bonds suggests a search for safety rather than risk an investment in equities (see this graph showing the marked decline in yields from 4% in 2014 to 2.4% now).

Behind the praised December quarter GDP figure is a message – Australia’s competitive position needs to be lifted both internally and externally through reforms that reduce the role of government.

The more so when the sharp decline in yields onthe government bonds suggests a search for safety rather than risk an investment in equities (see attached graph showing the decline in yields from 4% in 2014 to 2.4% now). The downward trend in business investment in non-mining over the past year also suggest additional risk aversion in the business  sector (total investment including mining in real terms was 18% lower in the December half year 2015 than in the same period of 2014).