Outlook highlights risks, a dash of politics doesn’t help

With GDP stuck below three per cent, inflation and interest rates at two per cent and business confidence lower than the reality of our economic operating environment it will be vital the economy is stimulated by genuine reform options championed by government.

The economic risks for Australia have been much talked about- falling mining capex, slowing global growth with both the IMF and World

Bank downgrading forecasts and continuing uncertainty about China’s economic sustainability.

Politically Australia faces a swathe of federal and State elections, and at the national level growing despair at the timidity of the Government to use its standing in the polls and popularity of the Prime Minister to argue the necessary reform measures so desperately required.

But one of the concerning issues domestically is the lack of business confidence.

CEDA’s 2016 Economic and Political Overview being released today examines Australia’s domestic and international competitiveness, and suggests how drastic measures need to be taken to sustain an economy in transformation.

While it is unlikely we are heading for recession as some pundits had suggested last year, it is nevertheless significant that income weakness is a risk and in 2015 it was the weakest it has been since the early 1960s.

Add a dash of politics and the outlook doesn’t get any better.

A major and growing part of the problem driving low business confidence is of course the fact that the business community had high expectations for the Turnbull Government. The new Prime Minister was making all the right noises, everything was on the table, there was never a more exciting time to be Australian, and expectations were stratospherically high that he understood the scale of economic reform that was needed.

The leadership change was accompanied by commensurate goodwill from the business community and economists, which generally recognised the need for major structural reform, beyond simply tax, that brought back into focus the forgotten element of the reform agenda – balancing the budget equitably.

Unfortunately, that confidence is rapidly diminishing as the hype has failed to materialise into positive action. This is not necessarily the Prime Minister’s fault. He has faced internal turmoil with the loss of five Ministers in a short period for varying reasons, a difficult Senate and a looming election. 

However, this cocktail of issues means the political capital and will necessary to take the hard decisions is falling away. It remains a very big table but slowly but surely what is left on it shrinks by daily media release.

As we move closer to a Federal Election the likelihood of this situation changing decreases further. The ruling out of any consideration of changing the GST this week is further evidence of this. Once again it appears we are headed for a narrow tax reform debate with items ruled in or out before the national debate and discussion that needs to happen has even really begun.

And as for the much-heralded tax Green and White Paper concept business is seething that so much effort and energy has been expended in making submissions that have proven useless.

Low business confidence means we won’t get the investment needed to drive new jobs in the non-resources sectors and overall income growth. Opportunities from a growing Asian middle-class and an Aussie dollar at a level that should encourage innovative advanced manufacturing must be explored.

Housing construction has picked up some of the slack but even this sector faces some uncertainty with the APRA-imposed 10 per cent cap on banks’ lending for investment properties and political duelling over negative gearing.

The focus must be on policies that deliver commercialised innovation – not just talk of innovation – and a workforce with the skills to be job ready for the next generation of jobs that will enable Australia to be internationally competitive and domestically sustainable. Government policy must support productivity growth by encouraging business to invest in new technologies and physical and human capital.

Taking all these factors into consideration, CEDA’s EPO is predicting the Turnbull Government will be returned to office, albeit with a reduced majority. Business confidence has been impacted by Federal Government uncertainty, five Prime Ministers in five years is unprecedented. It is therefore imperative that the Government pursues actionable policies that will deliver real structural economic reform.

Read CEDA's 2016 EPO report.