No ‘barnacles’ left by Christmas?

 The Australian Abbott Government is moving to ‘remake itself’ before Christmas, writes John Hewson.

2015 is promising to be a very volatile year in financial markets, depending importantly on how governments and policy authorities respond to circumstances as they unfold.

As the US struggles to consolidate its economic recovery, the ‘game-changer’ will be if, and when, the Federal Reserve moves to raise interest rates, against the background of a hostile Congress, seemingly hell-bent on making Obama’s final two years as difficult as possible.

The Republican controlled Congress is already threatening to deny Obama budgetary support for his recently announced immigration reform, and to seek to roll back Obamacare.

There is no doubt that the Fed’s ‘quantitative easing’, that flooded the world with liquidity, worked to rekindle a recovery in the US, but not as strongly as was expected, and also worked to underwrite more speculative investments globally, especially in emerging nations.

There is considerable uncertainty how the reversal of this policy, putting upward pressure on US interest rates, will take effect, but the dangers are some slowing in US economic growth, a correction in global stock markets, a shake out in bond markets, with money flowing back into the US, strengthening the US dollar, at the expense of other economies and currencies.

At the same time, and in sharp contrast, Europe and Japan will continue to struggle with their attempts to avoid another recession with deflation, as they move to do more ‘quantitative easing’, while China struggles to sustain its economy that is slowing more than they had expected.

Depending on just how these circumstances are managed, a compression of factors and events could see financial markets buffeted, sometimes with more extreme movements in the values of shares, bonds, commodities, and currencies.

Overlaying all these economic pressures are some very uncertain geo-political tensions – Russia and Ukraine, ISIS, Ebola, Iran’s nuclear intensions, and so on – again, it is very difficult to judge just how these circumstances will play out.

It is not inconceivable that a ‘compression’ of economic and geo-political events could manifest in ‘wild’, short-term, responses in financial markets.

As the Abbott Government moves to ‘remake itself’ before Christmas, removing what Abbott has called certain ‘barnacles’ on it performance to date, they will need to begin with a very realistic assessment of these global economic, financial and political risks to our economic prospects.

Our economy is clearly flatter than they expected and, importantly, commodity prices have been, and promise to be, much weaker than expected, than when the Budget was cast in May.

It is also significant that our stock market is barely stronger than it was at the end of last year, while the US market regularly reaches new record highs.

The Budget is already way off track, with the deficit in this year, let alone the ‘out years’, is still blowing out, and yet the Government has failed to spell out how it sees the transition that our economy is making, from one based on a resources boom, to ‘something else’, with key sectors such as manufacturing in decline.

Consumers and business lack confidence, and are very hesitant in their spending and investment decisions.

The Abbott Government, despite phenomenal recent coverage for its efforts with MH17, ISIS, Summits and trade deals, is some 10 points behind in the polls on a ‘two-party preferred’ basis, with Shorten, even being mostly invisible, ahead of Abbott as ‘preferred PM’.

This should make for a ‘very interesting and intense’ Christmas in the Abbott household!

This piece was published in Southern Highland News: http://www.southernhighlandnews.com.au/story/2725937/john-hewson-no-barnacles-left-by-christmas/