Talk of an economic crisis has dominated the front pages of newspapers ever since Joe Hockey delivered his budget speech on May 13. Many investors are exasperated at the impact this is having on markets, particularly as many view the Australian economy as healthy by global standards.
Political commentators have called on the Coalition to seek greater consenus to push their budget changes through. Yesterday, in an address to the nation, marking his first year in charge, Tony Abbott sought to calm the situation by restating the government’s intentions to keep “building roads, ending rip-offs, protecting the vulnerable, repairing the budget and ensuring that our country is strong and safe.”
Here, four leading investors give their views on how the budget impasse is impacting the economy.
Con Michalakis, head of investments, Statewide Super
There are people saying we have a budget crisis. I see the 10 year government bond rate going from just under 4.4 per cent at the turn of this year and now it is 3.4 per cent. That is not a budget crisis. Consumer confidence is knocked back, but the bonds have rallied, which means that people think the economy is slowing or the world itself is difficult and of course it holds back cap ex, it stops people from spending and investing. I am not saying that people should be talking up things, but the word budget crisis is just crazy.
John Pearce, chief investment officer, UniSuper
There was clearly a short term hit to consumer confidence as reflected in retail sales and anecdotal feedback we get from consumer facing corporations [from the ‘budget crisis’]. However, from all accounts there has been a bounce back in July / August so it looks like situation normal as far as the consumer goes.
It would be fair to say that every executive we speak to would like to see Canberra ‘get their act together’, but the actual impact on business investment is highly debateable. Generally speaking I doubt that the impasse in Canberra is having a real impact on broader business. Of course, there will be pockets that are clearly impacted, the most obvious being the renewable energy industry.
The banking and finance industry is potentially more exposed to irrational outcomes from the Murray inquiry than the budget.
Matt Sherwood, head of investment market research, Perpetual
It is quite clear that Australia does not have a Budget crisis similar to those recently seen in Europe and South America. However, while Australia is not in the position of Greece, Italy or Argentina, we are certainly headed that way and among the 25 most developed countries, Australia is one of only eight whose public debt position will worsen in the next five years. As such, the best time to fix this leaking roof is when the sun is shining.
Despite discussion to the contrary, the May Australian Federal Budget was not particularly tight with the fiscal consolidation in FY15 totalling just +0.2 per cent, relative to +1.2 per cent in Peter Costello’s first Budget in FY96 and +0.6 per cent in Paul Keating’s return to surplus Budget in FY88. The Budget in FY15 was well designed as it took account of Australia’s position in the economic cycle with our much needed fiscal consolidation not sizable until FY17, after the mining investment cliff has passed and growth is forecast to be close to trend.
While there is little doubt that the FY15 Budget was not particularly tough, it was the toughest seen during 17 years of tax cuts and government handouts, and this change initially weighed on consumer confidence which declined to historically low levels, but nowhere near the troughs seen during the global financial crisis in 2008/09 (79) or Australia’s last recession in 1990/91 (69). Subsequently, consumer sentiment has improved to a level (98.5) which is slightly below its 40-year average (101).
The talk of a fiscal crisis in the Parliament is not having too much impact on the sharemarket which has recently risen in fresh six-year highs despite a spate of earnings downgrades in FY15. This has had little to do with the Budget’s rejection in the Senate, but rather the earnings fundamentals of an economy which will be growing at a sub-trend pace in the next 18 months, which will make earnings growth more difficult.
Michael Strachan, chief investment officer, Equip Super
I wish there was some leadership shown at the political level, because uncertainty about the budget is not good for the community’s confidence. That is what economies run on. If people feel secure they are going to have a job, they’ll go a buy a new car, if they are not sure they will hold back. And if they are not spending then you do not have production. So it would be nice to get some resolution. Stop the squabbling, lets go on with it.