Future shock!

October 25, 2012, 4:08 pm Peter Switzer Yahoo!7

If good sense prevails in Martin Place Sydney "the home of the RBA" and also in Madrid, Beijing and Washington, then we could grow at better than three per cent.

In the context of a financial future, some really big economic and market events came along this week.

But the really huge ones lie ahead with their outcomes bound to have a big impact on the political fortunes of the Treasurer Wayne Swan and the Gillard Government. But that’s not all. Those events, as I call them, could have a massive bearing on your material welfare, the value of your super and even how much your house is worth!

Mini-budget analysis

The week kicked off with the Treasurer’s Mid-Year Economic and Fiscal Outlook (MYEFO), which is a snapshot of how the Budget is panning out. The bottom line was, it wasn’t going as well as he would have liked and as a consequence families will cop a reduced baby bonus. The favoured first one still delivers $5000 but ensuing offspring will be worth less — $3000!

Big companies will have to pay their company tax monthly, there will be a reduced healthcare rebate and there were a range of annoying changes to help Mr. Swan get his Budget into a $1 billion surplus.

However, the real information that underpins why he had to make his changes was Treasury’s new calculation on how fast we’re set to grow. Only in May it predicted 3.25%, which I argued was a chance, but I didn’t have the certainty that the Treasurer had on Budget night.

The number crunchers in Canberra now say it will be 3%, and simply if we get less growth, then there are less people in work meaning tax collections fall and unemployment relief hurts the Budget’s bottom line.

The likes of former Opposition leader, Dr. John Hewson, one of the country’s best economists in his academic days, can’t see 3% ahead and believes that interest rates need to come down further — a lot further!

Cup Day rate cut?

In fact, this week’s inflation data, which came in bigger than predicted, has underlined the very close connection between the Gillard Government’s fiscal or budgetary policy and the Reserve Bank’s monetary policy.

In turn, this shows how dependent Wayne Swan’s figuring will be dependent on what Glenn Stevens — the RBA Governor — does on Cup Day.

In simple terms, if the RBA cuts on the first Tuesday in November and maybe in December or early in 2013, then the Oz economy could get a big wriggle along.

Lower rates will do three things — speed up consumer spending, lift business investment and lower the dollar. Combined, this could pump up economic growth. By the way, if gross domestic product grows faster than 3%, then Wayne Swan gets a bigger than predicted Budget Surplus and the world’s greatest Treasurer looks exactly like that ahead of the election later next year.

The foreign connection to the Budget Surplus

So Stevens is important to the Treasurer, but so will be the Spanish Prime Minister Mariano Rajoy, as well as the next US President along with the Congress he has to work with after Cup Day!

Yep, the US poll is on the first Tuesday in November, so both Australia and the US will be making a big bet on the same day!

The foreign connection to our promised Budget Surplus can’t be underestimated. In a perfect world, the Spanish PM would ask for the bailout package.

That would mean the European Central Bank (ECB) could help his country access cheaper funding, but his voters would have to cop a bit of imposed austerity, which could be little joy for Mr. Rajoy.

However, it would help the EU’s confidence and would boost stock markets worldwide, as one more problem would have been dealt with.

Over the cliff

I’m assuming the China problem is already getting better, so that leaves us with the USA’s fiscal cliff.

The cliff is something the US economy could go over in the New Year if the new President can’t convince the Congress to come up with an alternative to some automatic measures to cut spending and to raise taxes, all to deal with the country’s Budget Deficit and huge public debt.

These fiscal tightenings would push the US economy into recession, but the stock market will slump before if the Congress negotiations are poor and it will go even lower after it all happens.

A collapse of Wall Street would have reverberations right around the world and so if our All Ords slides big time, so will confidence, and Mr. Swan can forget about Budget Surpluses!

The quadrella

Be clear on this, if good sense prevails in Martin Place Sydney — the home of the RBA — and also in Madrid, Beijing and Washington, then we could grow at better than three per cent.

And if this quadrella happens, not only do we cheer a Budget Surplus, an internationally made genius of a Treasurer and a solidly rising stock market, but also a much better economy to get jobs, make profit and to see our house prices head in the right direction.

Let’s not even think of the alternative, worst-case scenario. That’s a future shock most of us wouldn’t want to deal with.

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