Terry McCrann: Financial reality check for new leader


THE incoming government is going to be ambushed. It's going to be ambushed by reality.

It always is, even when it's the incumbent being returned to power. Even though the ambush isn't always negative, sometimes a government, whether new or returning, has been ambushed by an unexpected boom.

In 2007, new PM Kevin Rudd and Labor got ambushed by the Global Financial Crisis. But in 1983, the previous Labor government to be elected, Hawke-Keating, came in just as the economy was recovering and the drought was ending.

Rudd and co never recovered. In contrast Hawke and Keating actually worked off the uptick - until they ran smack into the 1990 recession, although that was largely brought about by their own actions.

They should have lost in 1993, but didn't thanks to the ineptitude of then-Liberal leader John Hewson. Otherwise Paul Keating would have been an even more short-lived PM.

Reality for the new PM and his treasurer - most likely Bill Shorten and Chris Bowen - will start to come in a little over two weeks when the Reserve Bank will cut its official interest rate from its already record-low 1.5 per cent to 1.25 per cent.

A second cut could follow immediately in July, but if it does be afraid, very afraid. The second cut would only happen if the jobless rate had spiked sharply higher.

Right now, continued strong jobs growth - and still strong coal and iron ore exports - are the only clear-cut good things happening. Retail spending is weak, wages growth is weak, households are heavily indebted and then there's the property market. Hopefully, that's now bouncing along the bottom.

The first thing that will happen is that the new government gets briefed on the economy by Treasury.

Hawke and Keating worked off an uptick, until the 1990 recession.
Hawke and Keating worked off an uptick, until the 1990 recession.

If it's Sco-Jo - Morrison and Frydenberg - they won't be told anything they haven't already been told. Not that Treasury necessarily "knows" anyway.

If it's Bi-Chri - Shorten and Bowen - they might be in for a rude shock. It's critically important they listen. It's even more critical that they are prepared to amend at least the timing of their policy proposals if not ditching some of them entirely.

The first thing they might discover is that this is not a good time to whack the economy with $160 billion of new taxes.

In my judgment we are not facing a return to 2008 and even less a return to 1990 when our economy last went into recession. Then the jobless rate went past 10 per cent and stayed there for years; now it's at 5.2 per cent.

Wall St does not look like it's about to go over a cliff (but then, it usually doesn't "announce" it's intending to). The US economy is running strongly and again, I don't see it being derailed anytime soon.

The big worries are China - not just the biggest buyer of our iron ore and coal but the biggest supplier of tourists and students into our economy - and its trade war with the US.

I believe they will do a deal - they have to and President Trump is nothing if not a deal-maker. The Chinese economy has got major challenges, but again my best guess is that they will battle through.

Add it all up and new PM and new treasurer need to stay flexible and receptive to both the best advice from Treasury and the RBA and whatever gets thrown at us by the rest of the world.

We don't have to be alarmed but we do have to be alert.


News Corp Australia

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