The sudden elevation of Malcom Turnbull to Prime Minister could provide a much needed boost to both business and consumer confidence in the months ahead – if he is successful in outlining a more positive economic “narrative” as promised. In turn, this could provide at least a short-term boost to the Australian dollar and share market, and further reduce the chances of another official interest rate cut from the Reserve Bank by year-end. That said, other global economic developments – notably concerns over China and rising US interest rates – are likely to remain a major underlying driver of the economic and market outlook.
Confidence in the doldrums
As seen in the chart below, both business and consumer confidence have wallowed at below-average levels for some time, which is consistent with the subdued pace of household spending and business investment.
While economic factors have been clearly important drivers of confidence, politics may also have played a role. Rightly or wrongly, Tony Abbott was not an especially popular Prime Minister within the electorate. As seen in the chart below, Abbott’s “satisfaction rating” as Prime Minister averaged 35% during his tenure – even lower than Julia Gillard’s over the same first two year period of her time in office.
Interestingly, Keating was even less popular than Abbott during his first two years in the job. Howard and Hawke had similar ratings in their first two years, with Howard (unlike Hawke) largely able to retain his standing through to the end of his term. Rudd was the standout, with an average 61% satisfaction rating during his first two years – though even this had dropped to 36% by the time of the Gillard overthrow.
Popularity aside, the business sector had also become increasingly dismayed with the lack of direction and reform “zeal” of the Abbott Government. It’s been argued Abbott was good at articulating what he stood against (making him an effective opposition leader), but was never able to move beyond negative campaigning once in power.
Prime Minister Malcom Turnbull has promised a more positive economic reform agenda, though what constitutes good reform is clearly in the eye of the beholder (or vested interest). Unlike Abbott, Turnbull has also promised to be more consultative with this cabinet ministers, which means any reform proposals that see the light of day will be subject to political compromise. Turnbull will also have to negotiate passage of any reforms through a fractious and increasingly “populist” gaggle of cross-bench Senators.
In terms of structural reform, shoring up the tax base through a broadening of the goods and services tax (and raising its rate) would be welcome, and Turnbull will also likely be more sympathetic to changes to superannuation tax concessions. Given the still large Federal budget deficit, there is probably not a lot Turnbull can do to “pump prime” the struggling economy anytime soon. That said, Turnbull has the economic credibility to at least start an overdue conversation about the legitimate use of public borrowing to fund critical national infrastructure as needed – through say the development of “Infrastructure Bonds”.