Sprigs of hope in the Gillard gloom

Many smaller businesses around Australia are thinking of throwing in the towel. If it’s not too late, hang on because I can see some clear sprigs of upturn emerging through the gloom.

As you all know I am not a screaming bull but big share market rises are normally followed by a rise in the real economy, even when all seems hopeless.

I realise that global and local stock markets are not pricing risk (Unpacking the gravity of Australia’s gas mess, May 6) and that here in Australia we have more bad news ahead, which will see interest rates fall further.

Australia’s best interest rate forecaster Westpac’s Bill Evans (and our weekend economist) says the official interest rate in Australia will fall from 2.75 to 2 per cent.

So where do my sprigs of optimism come from?

Along with ANZ chief Mike Smith I have been forecasting a surge in the economy assuming that Tony Abbott wins the next election by a big margin.

And so my first optimistic sprig comes from the decision of the Gillard government to drop the proposed tax cuts and lift the medical levy. I can’t remember a government going into an election that has ever taken such actions.

That means if there was ever a doubt about a landslide election result it has now gone. But it also means that while they might have made every mistake in the book, in their final months, the Gillard government will not inflict further damage.

And the carbon tax which was a crazy piece of policy from day one will be slashed even under current government policy and eliminated under Abbott. Hallelujah!

Of course in New South Wales we still have Gillard’s third sin – the gas price mess – to sort out but eliminating/reducing the carbon tax will at least help.

My second sprig of optimism comes from what is happening in the eastern states. Victoria, New South Wales and Queensland are set to slash infrastructure construction costs by banning the cartel-style agreements between big commercial builders and building unions.

And then the eastern states are going to combine an abundance of capital available, low interest rates, and low building costs to go on an infrastructure building spree. Our two most populated states, New South Wales and Victoria will lead the way. And that infrastructure spending will come just at the right time and the right place (where the people are) as the mining investment is cut back.

The combination of the cutbacks in overseas funded mining investment around 2015, the lower Australian interest rates and a rise in the US dollar should take the pressure off the Australian dollar.

Finally, Morgan research shows that Australian unemployment has fallen substantially and is now at its lowest for nearly a year. However, driving that was a fall in the number of Australians looking for work, rather than a surge in employment, and the small rise in total employment was the result of a strong rise in part-time employment.

My economist friends will tell me that none of the above will be big enough to dramatically change the Australian economy but never underestimate the confidence surge that will come from the business community in post-Gillard Australia.

Meanwhile, China has to go through a period of adjustment and so may not drive us upward at the rate we would like. But Chinese demand should hold on. Meanwhile we are seeing clear signs of improvement in the US and Germany. Moreover last night we saw some of the excess global money finding its way into commodity prices and if that continues it will inject more cash into Australia.