Federal poll stands as the pivotal point in a period to ponder
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 again kick in as an income driver.
Some progress will be made in 2013. Just over half of a $43 billion decline in capital productivity between 2005 and 2011 is tied to investment in mineral projects that are 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-resource companies have reacted to tough conditions by controlling costs and keeping a lid on job numbers.
A similar process is now under way in the resources sector as miners respond to lower commodity prices, but the national productivity debate will intensify in 2013 and be one of the economic themes of the federal election.
Tony Abbott's promise 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.
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 in 2013 will be a vote-buying exercise that pushes surpluses even further away.
The still-likely election of the Coalition, meanwhile, 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 is with the Labor government, 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.
PROFITS: The domestic economy is slowing as the new year approaches and will continue to slow in the first half of 2013. 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 local shares remains to be seen. Company profits were under pressure this year, and the S&P/ASX 200 Index rose 15 per cent. Quality shares rose strongly because they offered dividend yields that comfortably beat fixed interest - and that dynamic should continue to mid-2013 at least as the Reserve Bank continues to lower interest rates.
Frequently Asked Questions about this Article…
Productivity matters because it drives national income and company profits. McKinsey found Australia’s income rose at a 4.1% compound rate between 2005 and 2011 despite an average 0.7% annual decline in productivity — largely because the resources boom masked weaker productivity. As the resources boom fades, renewed productivity growth will be needed to support incomes and corporate earnings, which in turn affects share prices and investment returns.
About half of a reported $43 billion decline in capital productivity between 2005 and 2011 is tied to mineral projects that aren’t yet producing. When those projects become operational, what looks like ‘dead’ capital turns into productive capital, which should boost measured capital productivity and could improve returns for resource-related investments.
Yes — national accounts showed labour productivity rose 0.7% in the September quarter and 3.3% over the year, driven mainly by non-resource companies cutting costs and limiting job growth. For investors, improving labour productivity can help corporate margins and earnings resilience, though gains may vary by sector as miners and other firms adjust to lower commodity prices.
The election is expected to be a major economic theme. Labor’s decision to abandon its budget-balance promise raises the risk of vote-buying policies that widen deficits, while a likely Coalition win could bring policy changes that matter to businesses. That policy uncertainty can create periods of share-price volatility and sector-specific impacts that investors should watch.
The Coalition has proposed a less expensive alternative to Labor’s fibre-to-the-home NBN. Because Telstra’s existing deal is with the Labor government, a policy change would likely trigger fresh talks about Telstra’s role (for example, using copper for final connections). That uncertainty could lead to further share-price volatility for Telstra and related telecom stocks.
Scrapping those policies would remove specific industry costs but also create a revenue shortfall the government would need to fill. For investors, the immediate effect could be mixed: companies in affected sectors might benefit from lower regulatory costs, but markets will focus on how the government replaces lost revenue and what broader fiscal changes follow.
The domestic economy was slowing and expected to continue softening in early 2013, with global headwinds from Europe and a gradual US recovery while China grows at about 8% annually. That made the profit outlook uninspiring. Still, quality Australian shares performed well because dividend yields comfortably beat fixed-interest returns, and that dividend-attraction dynamic was expected to persist at least to mid-2013 as interest rates were being lowered.
As the Reserve Bank lowers interest rates, fixed-income returns fall, making dividend-paying shares relatively more attractive. The article notes this dynamic helped quality shares outperform and was expected to continue into mid-2013, supporting demand for dividend stocks even if overall profit growth remained muted.
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