Labor’s incoming government faces a number of economic problems from rising inflation to slowing economic growth, but economists and ratings agencies say those potential storms can be weathered and markets will take it in their stride.
With investors pricing in a change of government in Saturday’s federal election, the response in stock and other markets will be “muted”, Gareth Aird, the Commonwealth bank’s chief economist, predicted.
In early trading, the benchmark ASX200 share index was up about a third of 1% before paring gains. The Australian dollar was also slightly stronger against the US dollar.
“Whoever won government [on Saturday] night was going to inherit an economy that has a high rate of inflation and a very tight labour market, and therefore … a central bank that had to act on that,” he said.
“I don’t think there’s anything in what we’ve heard in the election campaign that would shift the dial in your economic forecast in a material sense for the next 12 to 18 months.”
The treasury secretary, Steven Kennedy, met the incoming treasurer, Jim Chalmers, at his home in outer Brisbane on Sunday afternoon to hand over the government briefing known as the ‘‘red book’’, the Australian Financial Review reported.
Aird predicts the Reserve Bank will lift the cash rate from 0.35% at each of its next three board meetings, with the first on 7 June. Investors are betting on a rapid run-up in rates as the bank tries to stamp out inflation expectations after consumer prices in the March quarter rose 5.1%, with underlying inflation at it highest level in 13 years.
Treasurer-elect @JEChalmers will have to make regular comments about RBA rate hikes in the months to come, if the futures market is any guide. #auspol #ausvotes pic.twitter.com/1XNtq3CZYQ
— Peter Hannam (@p_hannam) May 22, 2022
Alan Oster, NAB’s group chief economist, expects the RBA’s cash rate will reach about 1.5% by the year’s end. (An interest rate rise of 1 percentage point lifts repayments on a median home loan in Sydney by almost $500 a month and $350 in Melbourne.)
The RBA is independent of the government, as is the Fair Work Commission, which will make its annual ruling on minimum wage rises by the end of June – another economic signal out of the government’s control.
Despite Labor’s costings released on Thursday (which revealed a net $7.4bn in additional spending over four years) stoking some media attention about economic management, Oster said didn’t “really see much difference between both sets of policies”.
“The Australian economy’s more than $1tn a year, so an extra $10bn is nothing really,” he said. “I don’t think it’s a bad set of books [for Chalmers to inherit]. There’s a lot of uncertainties globally, but locally – provided the Reserve Bank doesn’t go stupid, and I don’t think they will – then we’re fine.”
Oster’s three biggest concerns are slowing growth in China as that country battles to contain Covid outbreaks; Europe’s year-end goal of weaning itself off Russian oil and gas; and a too-rapid rise of interest rates by the US Federal Reserve choking US growth.
“The sort of worries that scare the hell out of us out of the US, do not scare the hell out of us out of Australia,” he said.
Both Oster and Aird expect the Australian dollar to strengthen over time against the US dollar. On Sunday, the local currency was trading above 70 US cents.
The Australian dollar is hovering around the 70.5 US mark after the weekend election delivered a Labor government. Economists predict the currency to strengthen versus the Greenback although China's Covid curbs are among the headwinds. pic.twitter.com/QYpuwv7JfK
— Peter Hannam (@p_hannam) May 22, 2022
Based on sky-high commodity prices, the Australian dollar should be trading at about 78 US cents and should approach that level next year, Oster said.
David Plank, ANZ’s head of Australian economics, said that it only needed one shock to “blow you completely off the expected track – and in either direction, since not all the shocks are negative ones”.
In the next fiscal year, the risks in the deficit projection are currently on the downside, in part because of high iron ore and other commodity prices lifting both royalties and company profits.
“[The] nominal economy is looking much stronger than the Treasury expected at the time of the budget,” Plank said, with a lower-than-forecast jobless rate trimming expenses while inflation will boost tax revenues as the nominal economy swells.
On the other side, there will be “a lot of spending pressure built into current policy settings”, ANZ said ahead of the election.
“The rapid growth in spending on the NDIS is one example, with aged care another. These pressures will need to be managed regardless of who wins the election, especially given that significant tax reform seems off the table.”
The state of Australian finances awaiting @JEChalmers, the incoming Treasurer. #auspol #ausvotes pic.twitter.com/JfgJ2P8bIi
— Peter Hannam (@p_hannam) May 22, 2022
Economic data releases featured prominently during the election campaign, with soaring consumer prices and weak wages data denting the Morrison government’s economic management credentials and the 3.9% jobless rate for April burnishing them.
Ahead of the RBA meeting, the Australian Bureau of Statistics will release GDP data for the March quarter on 1 June. The Omicron disruptions will mean the quarter-on-quarter figure may come in at 0.2%, but the average for 2022 will be 4% before slowing to about half that next year, Oster said.
The economic outlook awaiting incoming-Treasurer @JEChalmers according to Treasury (left) in the pre-election fiscal outlook, and the RBA. #auspol #ausvotes pic.twitter.com/Q5blC2dCHj
— Peter Hannam (@p_hannam) May 22, 2022
Ratings agencies also get to vote on Australia’s economic management, and for now all of the big three – Fitch, Moody’s and S&P – are showing no sign of a hasty review of the country’s much-vaunted triple-A debt rating, even as gross federal debt is forecast by treasury to top $1tn in 2023-24.
A downgrade would lift the cost of borrowing, with investors demanding a higher yield to buy the debt.
Anthony Walker, an analyst at S&P global ratings, said that despite rising interest costs “Australia’s ability to service its debt is very high”, reflected in the “AAA” rating.
“We expect interest expenses to rise to about 4.2% of revenues, from 3.8%, over the next few years, reflecting higher yields and rising debt levels,” he said.
“Higher borrowing costs, though, won’t take a big bite out of the budget in the near-term because some refinancing is actually at lower interest rates than in the past.”
Jeremy Zook, the director of Fitch’s Asia-Pacific sovereign ratings, agreed that higher government borrowing costs will add only “modest” fiscal pressure over the next few years.
