Will Malcolm’s magic prevail over the R- word?

September 24, 2015, 9:46 am Peter Switzer Yahoo7 Finance

With a new Prime Minister ensconced in Canberra, the question is: can the early Malcolm magic be sustained?

The only way to answer this is to look at what he’s up against and then weigh up the chances of beating the negative forces that some think are stacking up against us.

Boil and trouble

Right now, Morgan Stanley is arguing that the housing boom is going off the boil.

Can a housing bubble do that? Or were the doomsday merchants, who warned about that ‘big problem’, the greatest owners of ‘hot air’ rather than Sydney’s real estate sector?

Meanwhile, Goldman Sachs says there’s a 33% chance of a recession, which, of course, means if you’re an optimist, you might say there’s a bigger 67% chance of us not embracing the R-word!

Slaying the dragon

Meanwhile, the greatest dragon Malcolm might have to slay is the problems coming out of China.

On Wednesday, the latest Caixin purchasing managers’ index dropped to a six-and-a-half-year low of 47, which was below the Reuters poll forecast of economists who went for 47.5.

This isn’t good for demand for iron ore and its global price, which, in turn, hits the profits of the big miners and the tax they pay. This hurts the Budget’s bottom line, which is already a big deficit.

Chinese growth targets

China’s current economic weakness says the Government’s goal of 7% economic growth will come in under that target, with the Asian Development Bank (ADB) forecasting a 6.8% result for 2015 and 6.7% for 2016.

For the Asian region, the ADB thinks it will grow by 5.8% this year and 6% in 2016, so it has revised down its March forecast of 6.3% for both years.

On top of that, the Fed’s decision to not raise interest rates was clearly linked to China’s weakness. Some nervous types think the US central bank knows something scary that the rest of the market can’t presently see.

Our stock market

All this explains why our stock market was down solidly on Wednesday and poses the question: why didn't the great consumer confidence number from ANZ and Roy Morgan mean more to the All Ords?

In case you missed it, the weekly reading of consumer sentiment rose 8.7%, the biggest spike since the index was created seven years ago.

The chief economist at ANZ, Warren Hogan, said it was clearly a ‘Malcolm Turnbull as PM’ bounce and what was great about the result was that consumer confidence has been struggling for over a year.

The chart below, which looks at the Westpac monthly reading, shows that most have been below 100, which means pessimists have outweighed optimists, which is terrible for an economy trying to beat a recession.

Even the very conservative News Ltd columnist Andrew Bolt agreed that if confidence goes up because of a new PM and the likes of Fairfax and the ABC are more even-handed in their treatment of Malcolm Turnbull relative to Tony Abbott, then the PM ‘switcheroo’ might have been worth it. (As an Abbott-supporter that would have been hard for him to admit.)

The media like Malcolm

I agree that negative consumer and business confidence is primarily derived from the media coverage of crucial economic and political events, data and reporting.

Therefore, if Malcolm’s magic means the nation’s newfound optimism is supported by more favourable media coverage, then this could be a strong force to help push Australian economic growth higher.

I believe the low dollar, low interest rates, high house prices, the most recent Budget and now a new PM with a greater emphasis on economic leadership, innovation and optimism will help economic growth rates rise but China and stock market volatility remain enormous challenges for Canberra.

The US scenario

I was hoping the Fed would have raised interest rates last week.

A small sell off would have resulted for stocks but then a sustained rally would have rolled into December, which is generally good for our stock market.

We’re big on Santa Claus rallies but this Fed delay of the rate rise has worked against my nice little timetable for a stocks’ rebound.

China helping Chairman Mal

Malcolm is going to need a little help if his magic is going to do the trick for our economy.

That has to come from China and it will have to be a surprisingly good economic reading that makes the doomsday merchants eat their words or Beijing has to come out with a killer of a big stimulus package.

If China comes to the party bearing some really big gifts, then I can see Malcolm ruling over a gradually improving economy, a rising stock market and ever-improving popularity polls.

However, if China can’t pull a rabbit out of its hat, then the new Turnbull A-team could end up in a real stew.

Mind you, I still don’t think it will be a recession stew but it sure could taste like it. Go China!

Stock Quotes

e.g. BHP, CBA