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Farewell fiscal ’16

If you’re like me, you’ll be scratching your head pondering how we’ve got to June and where 2016 has disappeared to. I am acutely aware that half the calendar year has passed as this Thursday marks the end of another financial year. While closing a financial year is not as significant as ending a calendar year, it’s nonetheless an important milestone in the corporate world.

Over the coming weeks, Australian businesses will be calculating their bottom line for fiscal 2016 and producing a report card in the form of an annual report to shareholders. Before getting too consumed with these once-a-year processes, it’s appropriate to look back on the financial year that was. 

Globally, fiscal 2016 (when the figures are eventually tallied) will provide further evidence that lower economic growth has become the “new normal” in both advanced and emerging markets. Many negative factors impacted growth including Greece’s debt woes, Japan’s faltering recovery and China’s financial gyrations.

Last August, Beijing sent shock waves through global financial markets when it unexpectedly devalued its currency. In an historic move four months later, the US Federal Reserve raised its federal-funds rate by 25 basis points. In February this year, 12 nations - including Australia and the US - signed the landmark Trans-Pacific Partnership (TPP), the largest regional trade deal in history. 

Against this backdrop, the business environment across the globe over the past financial year has been mixed with market volatility stoked by the steep decline in oil prices. Uncertainty and pessimism dominated the economic news (not to mention Ebola and terrorism) and the business community had to work hard to understand where opportunities laid and dangers lurked.

Domestically, the Reserve Bank of Australia supported the economy with historically low interest rates. That support intensified last month when the central bank moved the cash rate down by 25 basis points to 1.75% to head off fears about deflation and to encourage household spending. This easing in monetary policy caused the Australian dollar to tumble. 

No review of the past year would be complete without assessing the impact of politics. Around the world, governments shaped their fiscal and monetary policies to achieve specific national objectives. Some of these policy settings (as in the US) were helpful to the local economy while other policy initiatives (such as in Brazil) did not halt economic decline. 

As always, political instability played a part in economic outcomes. An unstable political climate makes consumers nervous and investors wary. According to an IMF Working Paper, political instability:

…is regarded by economists as a serious malaise harmful to economic performance. Political instability is likely to shorten policymakers’ horizons leading to suboptimal short term macroeconomic policies. It may also lead to a more frequent switch of policies, creating volatility and thus, negatively affecting macroeconomic performance.

During fiscal 2016, the world witnessed significant political unrest. Last September, a political leadership change occurred in Australia with the appointment of a new Prime Minister - the fifth time in as many years. But arguably the greatest political turmoil occurred (and is still occurring) in the US as a result of a tumultuous presidential election. 

The rhetoric on the campaign trail is divisive and disturbing with economists concerned at proposals to curtail trade, restrict immigration and cut taxes. In a Wall Street Journal survey, more than 80 per cent of economists see downside risks to the American economy if Donald Trump is elected. Meanwhile, the Intelligence Unit of The Economist recently described Trump winning the US presidency as a “global risk”. 

Understandably, the US election is a hot topic for The Economist. Its 7 May, 2016 print edition bore the banner headline, Trump’s triumph: America’s Tragedy, with the article stating: 

...it is now clear that Republicans will be led into the presidential election by a candidate who said he would kill the families of terrorists, has encouraged violence by his supporters, has a weakness for wild conspiracy theories and subscribes to a set of protectionist and economically illiterate policies that are by turns fantastical and self-harming.

The perils of populist politics are real and the biggest loser is sensible public policy. As others have opined, I too find it frightening that populism is trumping realism with sound economic and social policies the casualties of a bitter contest for the Oval Office.

 

Regards

Paul J. Thomas, CEO

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Posted Monday, June 27, 2016    View Comments 0 Comments    Make a Comment Make a comment  

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