Casting a vote for fiscal themes of election year
In 2013 P-words are going to be prominent. Here are a selection of the big ones to watch out for.
E PRODUCTIVITY McKinsey & Co reported in August that Australia's income had risen at a compound rate of 4.1 per cent a year between 2005 and 2011, despite an average 0.7 per cent annual decline in productivity. Income from the resources boom turned the productivity decline into an income gain and, as the boom deflates, Australia needs productivity growth to once again kick in as an income driver.
Some progress will be made next year. Just over half of a $43 billion decline in capital productivity between 2005 and 2011 is tied to investment in mineral projects not yet up and running. What looks like dead capital will become productive capital when those projects go live.
The September quarter national accounts also show an improving trend for labour productivity. It rose by 0.7 per cent in the quarter and by 3.3 per cent in a year, mainly because non-resources companies have reacted to tough conditions by controlling costs and keeping a lid on job numbers.
A similar process is under way in the resources sector, as miners respond to lower commodity prices, but the national productivity debate will intensify and be one of the economic themes of the federal election.
The promise made by the Opposition Leader, Tony Abbott, to get government and business into the same room to talk about solutions potentially opens up a fascinating dialogue. Business leaders have been attacking declining labour productivity and bureaucratic red tape but process has been triumphing over product for years inside corporations, too - as anyone who works inside a big company can confirm.
E POLITICS, POLLS AND
PROMISES Labor's Christmas Eve decision to abandon its promise to balance the federal budget this financial year was a recognition of reality but it raises the risk that the federal election campaign next year will be a vote-buying exercise that pushes surpluses even further away.
The still-likely election of the Coalition holds out the prospect of several changes that matter to businesses and the markets.
The Coalition shows no sign of scrapping Labor's Fair Work regime but is committed to replacing Labor's fibre-to-the-home broadband network with a less expensive version.
That would usher in another period of share price uncertainty for Telstra. Its existing deal with the Labor government would be overrun and it would enter new talks about its participation in a Coalition network that uses Telstra's copper wire to make its final connection to many established homes and businesses in cities and towns.
Labor's carbon-trading regime and its underpowered Minerals Resource Rent Tax would also be scrapped by a Coalition government. The business focus would not just be on their removal but on how the Coalition intends to fill the revenue gap.
E PROFITS The domestic economy is slowing as the new year approaches and will continue to do so in the first half of next year. With Europe still mired in its sovereign debt crisis, the US economy only gradually recovering and China settling at an annual growth rate of about 8 per cent, the outlook for Australian company profits is uninspiring.
Whether that translates to an ordinary year for Australian shares remains to be seen, however. Company profits were under pressure throughout this year and the S&P/ASX 200 share index rose 15 per cent. Quality shares, including bank shares, rose strongly because they offered dividend yields that comfortably beat fixed interest - and that dynamic should continue through to mid-2013 at least as the Reserve Bank continues to lower interest rates.