Welcome to 2013-14. This will be a year of transition where the current signposts become more obvious. In a year’s time we will have a very different view of the world.
The outcome for Australia will be clearly improved if there is a Coalition government but the fundamentals will not have changed.
So here is my list of 2013-14 signposts, which will transform the world, as we have known it.
– I start with what is happening in China. Our world actually changed in February 2013 when it became clear that China was planning a massive change in its growth patterns moving away from energy intensive steel based growth (China makes a frightening energy shift, February 7).
That change is now unfolding, with major Chinese interest rates hikes reflecting the fact that much of the recent boom-style investment was badly funded and uneconomic. As China’s growth swings to a less energy and steel-based direction our miners will find it tougher. Coal has already been affected. We must move from being a high cost mineral producer back to one that is low cost. We are doing this (Kevin must learn BHP's tough new lesson, June 20).
– In the US the fiscal contracting of the economy continues so we may have offsetting quantitative easing for longer than markets expect. But by the end of 2013-14 the QE era will clearly be being wound down and that will see a rise in the US dollar and big fluctuations in shares and bonds. It may happen earlier. Leaving aside the mad Wall Street gamblers who currently dominate share and bond markets, longer term I believe that the US – not China – will drive the world forward in coming years on the back of low cost – and lower carbon – energy plus high technology and low labour costs. This will be evident by the end of 2013-14.
– Most predict a simple long, hard recession in Europe for many years ahead. I don’t believe that is politically sustainable so I think that during 2013-14 there will be another explosion. Italy is my prime candidate but there are plenty of other possibilities. I do not think populations will stand for an extended contraction to maintain a single currency. And the Germans are waking up that they are going to be drained of their savings. Again if, I am right, and there is to be another crisis then 2013-14 is the year. Any European crisis destabilises the banking system but our banks are ready for it, while hoping it won’t happen.
– In Australian business, 2013-14 will be the year adjusting to the new reality. By year’s end mining investment will be heading south and the workers returning home to a business community that is reducing its cost base. The lower dollar will make this process less painful. I very nervously predict that General Motors’ workers will vote to keep their jobs (Decision made: GM will shut without a labour deal, June 24) and Toyota workers will make similar moves.
Such actions by these workforces plus the lower dollar will mean we will keep an automotive industry. I do not make that prediction with a lot of confidence but whether the auto workers and managers prefer the dole to work then the outcome will be the same for Australia – we are looking at a much more efficient business community looking to operate on lower costs.
Meanwhile the big builders and big unions will work hard to keep their highly profitable cartel style agreements but I think they will fail, so commercial building costs can fall 20-30 per cent in the next two or three years. This will be a huge boost for Australia. We are already seeing a new era in some food processing costs.
– As the US dollar rises I expect our dollar to first fall below 90 cents – and then as we reach the end of 2013-14 the discussions will be about how far below 80 cents it falls. Those manufacturing, agriculture, tourism, educational and export-import replacing industries that survive and lower their costs will do well.
– The lower cost environment will extend to government services if the Coalition wins. The boost to small business Australia from a Coalition win will be massive and in time change the employment outlook. Kevin Rudd is the best political campaigner in the country so I make no election predictions.
– Whoever wins government will engage on a major infrastructure investment program, which will eventually be funded by the self-managed superannuation funds because they are major long-term investors. At the moment they are kept out of the infrastructure market and governments have not yet worked out how to tailor investment products that are not high risk. New South Wales is getting closer but by the end of 2013-14 we will overcome those problems. It’s an easy fix.
– As is normal, on the basis of a continued high dollar Treasury will be again wrong in tax collection estimates because they don’t understand the changes in mining stemming from the Chinese outlook. A lower dollar would help them.
By the end of 2013-14 global interest rates are likely to be on the rise and so will Australian rates. But there will be the cuts in Australia in the in the meantime. But interest rate have limited stimulus effect in the current environment because they have become a generational transfer wealth transfer mechanism that makes older people demand more money from corporations so they increase their dividends, invest less and employ fewer people.
It’s a very different world but one where there will be many opportunities.