Skip to content

Australian Strategies 2016 Forecast

PM Malcolm Turnbull

2016 promises to be a difficult year for Australia. Try as we may, Australian Strategies cannot bring itself to embrace the cautious optimism that is being expressed by many commentators and analysts. We hope to be proved wrong, preferring to believe Malcolm Turnbull’s rhetoric that there “has never been a better time to be an Australian”. But the signs point to a scrappy year, much like 2015.

While concerns about international and regional security in an era of Islamic terrorism remain, our apprehension is mostly about the economy. 2016 will continue to be dominated by the politics of the past. The focus of the Turnbull government will – despite its promises – be less about policy and much needed economic reform, and much more about winning the next election, most likely in the latter part of the year.

Forget about sensible measures like increasing the GST sales tax to 15 or even 12.5 percent. Without state support, Turnbull and treasurer Scott Morrison will ‘chicken out’ of this necessary move and, in doing so, deprive Labor of its most potent weapon in an election campaign.

Similarly, we can forget about much-needed workplace reform. The employment minister Michaela Cash has already backed away from her earlier tough rhetoric, and driven into the long grass the Productivity Commission’s recommendation to cut Sunday penalty rates from double pay to time-and-a-half.

The Government is edging into 2016 with a barely hidden agenda of ‘not frightening the horses’; in other words, seeking not to lose the potential votes of tens of thousands of Australians who abandoned Labor and lacklustre leader Bill Shorten after Turnbull seized power last September. Curiously, it was Abbott’s reluctance to adopt supposedly unpopular policies that was Turnbull’s chief weapon when he labelled the former prime minister a poor economic manager.

The early Turnbull narrative sounded promising. We believed it. But, as things stand, he appears to be abandoning the tough policies needed to rein in a Budget deficit that will, as officially announced, take longer to correct. The government’s approach now seems to be what the British know as ‘muddling through’ and Australians as “no worries mate, she’ll be right’.

Except that she won’t.  Australia’s competitiveness and terms of trade are declining. The prices of iron ore and coal have fallen well beyond Treasury expectations, and will fall further, along with the price of another important export commodity, natural gas. The economy is in transition from one based on resources to an expanding services economy.

All this will make achieving the government’s goal of more jobs, growth, and savings much harder. Nervousness about China’s faltering economy adds to the uncertainty.

Even without these problems, Turnbull faces dissent within the Coalition he leads. Abbott is still riled about his ‘dispatch’ – the first Liberal leader ever to be removed by his party while in office. Despite his promise that “there will be no wrecking, no undermining, no leaking and no sniping”, Abbott has done little else since September. He has picked the issues carefully to appeal to the rump on the right of the party that believes Turnbull is too much of a moderate.

Tony Abbott
Unpopular: Tony Abbott

So far, Abbott’s speeches, briefings, articles and interviews have focussed on Australia’s involvement with the United States in the fight against Islamic State (Abbott favours more Australian boots on the ground) and his view that Australians are in denial about  “massive problems within Islam and should proclaim their culture is superior”.

After police and the security services proclaimed inflammatory rhetoric towards the Islamic community is detrimental to intelligence gathering, Turnbull was forced to make a strong defence of Australia’s successful multiculturalism, saying “we have to be very careful not to play into the hands of our enemies, and seek to tag all Muslims with the crimes of the few – the simple fact is that the vast majority of Muslims are as appalled by those acts of terrorism as we are.”

Abbott will keep sniping in the belief he could make a comeback, but it will not happen. He has few political friends left who have influence and is deeply unpopular with the electorate. In seeing Abbott ‘off’, Turnbull has increased his appeal to the public at the expense of Shorten who the polls now show is now seriously adrift in his home state of Victoria.

Most commentators believe the Coalition will serve its full term until October/November 2016.  However, there is also a fair possibility that Turnbull will be tempted into an early election, spurred on by frustration at lack of progress on economic reform. The danger is that sensible and necessary policy changes would be unpopular with an electorate used to soft government and an entitlement mentality.  Hence the probability of ‘muddling through’.  Longer term, the Labor state governments in Queensland and Victoria are liable to collapse, at which point reform by the Commonwealth government becomes easier.

Other issues in 2016 will include defence, foreign affairs, illegal immigration and climate change. A postponed defence White Paper will be published, reaffirming the US alliance and expressing concerns about the need to protect trade routes in the East and South China seas and the Indian Ocean.  The contract to build six new start-of-the-art submarines in South Australia will be agreed, with the Japanese partner likely to be favoured over German and French competition, despite intense lobbying from Europe.

Illegal immigration has been brought under control as a result of harsh bipartisan policies against would-be refugees facilitated by people smuggling gangs. At the same time, 12,000 refugees from Syria selected from camps neighbouring countries will arrive to be settled permanently. The government’s new entrepreneurs’ visa will also increase immigration.

In foreign affairs, the main focus will be on securing new free trade agreements with priority being given to Indonesia, India and the EU. Relations with Indonesia have improved from the low point in January 2015, helped by visits to Jakarta by Turnbull and foreign minister Julie Bishop.

For investors, 2016 promises to be much the same as 2015, with the AFX All Ords and S&P 200 flat-lining overall but with much volatility in most sectors and in many stocks. It could be a good year for the astute hedge fund manager or swing trader, but not that great for investors who observe from afar, or who only dip in and out from time to time.

ASXResources and energy stocks look mired until there is a recovery in export prices, and that could be some way off. The health sector holds some promise if Australia capitalises on the opportunities in Asia offered by the FTAs, but agriculture offers the best prospects, though the phenomenal success of small listed companies like Tasmania’s Bellamy’s are unlikely to be repeated.

Interest rates are likely to remain unchanged at 2 percent for the year; it is hard to foresee a surge in inflation or a negative sufficiently strong to force the Reserve Bank of Australia to make a change; if it occurs, any change in interest rates would be modest. As the American dollar firms, so the Australian dollar will weaken, and the prospect of this won’t do much to encourage portfolio investors into stocks.

House prices outside Sydney and Melbourne are likely to remain flat.  While prices in the smarter areas of the two main cities have recovered slightly, it seems unlikely they will recover to their peaks of mid 2015. An over supply of apartments is possible in both cities.

As always, Australian Strategies welcomes your comments.