While it can be easy at times to overstate the importance of events, I think it is fair to say that the next 6 weeks loom as very important to the medium and longer term outlook for Australia. The next 6 weeks sees a remarkable confluence of events, dominated by the federal election and the upcoming corporate earnings season.
First, we now have a September 7th date set for the election, with a very stark choice confronting the electorate. That choice is between a tired and failed Labor incumbent, which has been responsible for elevated levels of public spending and political instability; and a Coalition opposition with arguably more economic nous and a clear bias to reducing spending. Given the deteriorating nature of the federal budget, it is clear that something must be done to consolidate fiscal spending, introduce proactive and sustainable policy decision making, and get the budget to surplus over the cycle.
While opinion polls are mixed, there is no doubt that corporate Australia is crying out for a change. Increased labour regulation, an anti-competitive carbon tax and a general lack of industry consultation has seen corporate confidence hit close to historically low levels. In such an environment, the incentive to hire and reinvest is reduced.
Corporate reporting season commences over August, and this will be most interesting in gauging the outlook from a long list of corporate CEOs. Generally speaking, the outlook is likely to be subdued, with a soft consumer on one hand, and uncertainty around the election outcome on the other.
At the same time, the RBA is doing its best to kick start the economy, with another 25 basis point cut in the cash rate last Tuesday, to a more than 50-year low of 2.50%. However, the efficacy of these cuts has diminished over time, as consumers and corporates choose to save and pay down debt rather than spend. This is partly a legacy of the GFC. However, what the RBA cannot do is generate the confidence throughout the economy that is needed to transform these rate cuts into real activity. That is a political issue. Australia has been demanding political stability for 3 years now. It is required as a matter of urgency, and it is hoped that September 7th will be the start of that restoration.