Dear Malcolm,
Are you listening? It's me, Treasury. What follows is your incoming government briefing, or blue book, as it's known. We want to update you on how the economy is travelling, and point you in the direction of some stuff you might want to take care of.
First of all, congratulations on getting over the line. You thought dealing with the Nats was tricky. Now the hard work begins.
You've inherited an economic outlook that is delicately balanced – much like your parliament.
Internationally, Europe has just gone the full Bob Katter. Brexit was just the start. There are more financial market jitters ahead as other European nations consider heading to the departure lounge. Britain itself could take up to two years to finalise its slow motion train wreck.
And you'll want to keep an eye out for Janet. Yellen, that its. She's itching to raise interest rates in the world's largest economy, but she can't get it over the line. The US economy has picked itself up off the floor, but the timing of Brexit couldn't have been worse and there is the small matter of a certain other election later this year.
Closer to home, we regret to tell you China has gone off the boil. They won't be buying as much of our dirt. They may want some of our services, but really, it was our dirt where we had the real comparative advantage.
Watch out for Japan, too. We still ship a lot over there and they've gone into negative interest rate territory. Banks there will pay you to take out a loan – how's that for innovation?
As for Australia, we live in interesting times.
Perhaps the most striking feature of our economy at present is the near stalling of wages growth. Wages are growing at just a little over 2 per cent, the lowest since the last recession. Subdued pay packets are helping business to keep on staff and to lift our international competitiveness. The good news is you can finally put industrial relations reform back in the bottom of your filing cabinet. What wages pressure?
The inflation genie is, also, nowhere to be seen. In fact, price growth is looking a little on the low side. People are talking about deflation, but it's only been one quarter. We'll get another read later this month. For the moment, it's wiser to say we're just experiencing very low inflation.
The curious thing is that, despite this, the economy is growing at a pretty decent clip, at 3.1 per cent last financial year. We expect growth to slow to 2.5 per cent this financial year and next, however, before picking up again to 3 per cent the financial year after.
The receding tide of the mining investment boom is acting as a major drag on growth, with mining investment expected to shrink by more than a quarter in each of the first two years of your administration. Offsetting this, however, is that we've been getting more of our iron ore actually on to boats and LNG exports have been strong. Don't stop the boats!
Amid the uncertainty, households are holding up reasonably well. Interest rates are at record lows, after all. Most workers are missing out on decent pay rises, but even still, they're not saving as much as they used to of what they earn, which is supporting spending. Housing construction activity is picking up.
What we really need to see is non-mining businesses really start to ramp up their investment. We've been expecting this for a while, but it continues to disappoint. Business groups blame the instability of government, but you wouldn't know anything about that now, would you?
Overall, the slow transition from mining to non-mining continues. Usually our mining booms go bust spectacularly, so it's a case of so far so good.
Now what was it you were saying during the campaign? Oh yes, jobs and growth. How could we forget?
Well, some good news there too. We reckon the jobless rate – which crept up to 6.3 per cent – has peaked and is coming down. We expect the jobless rate to fall even further to 5.5 per cent by mid next year.
Markets are expecting another interest rate cut this year, as lower inflation gives the Reserve a bit more room to support the economy.
A lower currency would also help. But the Aussie dollar has kept its foot hold above US75¢. The Reserve Bank would like to see it lower, but Janet keeps putting off raising the relative rate of return on US dollar assets, keeping our currency higher. Dammit, Janet.
If you prove as incompetent as your predecessor administration in reining in budget deficits, however, we may lose our credit rating and that would knock some wind out of the Aussie dollar.
We wouldn't recommend it though. Budget repair should be your No.1 priority.
Looking into the crystal ball, we find it hard to see where the next big rise in living standards is going to come from. Aussies have become accustomed to a certain pace of improvement, thanks to China and commodity prices, but national income has been shrinking of late.
Population growth has slowed though, so what income gains we have are being shared with a smaller number of people than otherwise. Interestingly, more Kiwis are fleeing our shores than we've seen in a while. That Kiwi fella, John Key, increased their GST, fixed the budget and re-invigorated growth. You might want to invite him around for a cuppa at Kirribilli.
Anyhoo, that's about the size of it, Malcolm. Do let us know if you get serious about tax reform or fixing the budget. We won't hold our breath though.
