Labour’s incoming government faces a range of economic problems, from rising inflation to slowing growth, but economists and rating agencies say these potential storms can be weathered and markets will take it in stride.
Commonwealth Bank chief economist Gareth Aird predicts a “muted” reaction in stocks and other markets as investors price in a government change in Saturday’s federal election.
In early trade, the benchmark ASX200 share index was up about a third of 1 per cent before giving back gains. The Australian dollar was also slightly stronger against the dollar.
“Who won the government [on Saturday] The evening will inherit an economy with high inflation and a very tight labor market, so … the central bank that has to act,” he said.
“I don’t think anything we hear on the campaign trail will materially change the impact of your economic forecast for the next 12 to 18 months.”
Treasurer Steven Kennedy met incoming treasurer Jim Chalmers at his home outside Brisbane on Sunday afternoon and handed over what has been dubbed the “Red Book”, The Australian Financial Review reported. government briefing.
Aird predicts the Reserve Bank will raise the cash rate from 0.35 per cent to June 7 at the next three board meetings. After consumer prices rose 5.1% in the March quarter and underlying inflation was at a 13-year high, investors are betting on a rapid rise in interest rates as the central bank tries to quash inflation expectations.
NAB Group chief economist Alan Oster expects the RBA’s cash rate to hit around 1.5 per cent by the end of the year. (A 1 percentage point increase in interest rates would increase median monthly home loan repayments by almost $500 in Sydney 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 increases by the end of June – another economic signal beyond the government’s control.
While Labor’s costings released on Thursday, showing a net increase of $7.4 billion in spending over four years, sparked some media attention to economic management, Oster said “there’s not really much to see between the two sets of policies. big difference”.
“The Australian economy is over $1 trillion a year, so an extra $10 billion doesn’t really matter,” he said. “I don’t think it’s a bad set of books [for Chalmers to inherit]. There is a lot of uncertainty globally, but a lot of uncertainty locally – as long as the Reserve Banks don’t get stupid, and I don’t think they are – then we’ll be fine. “
Auster’s three biggest concerns are China’s slowing growth as it struggles to contain the coronavirus outbreak; Europe’s move away from year-end targets for Russia’s oil and gas; and the Federal Reserve’s rapid rate hikes that stifle U.S. growth.
“The kind of worry that terrified us in the US didn’t terrify us from Australia,” he said.
Both Oster and Aird expect the AUD/USD to strengthen over time. On Sunday, the local currency traded above 70 cents.
Aust said the Australian dollar should trade around 78 cents based on sky-high commodity prices and should be close to that level next year.
David Plank, head of Australian economics at ANZ, said it only took one shock to “take you completely off track – in either direction, because not all shocks are negative” of”.
Risks to deficit forecasts are now on the downside for the next fiscal year, in part due to high iron ore and other commodity prices, boosting royalties and company profits.
“[The] The nominal economy looks much stronger than what the Treasury Department expected at the time of the budget,” Planck said, with lower-than-expected unemployment and spending cuts, while inflation would increase taxes as the nominal economy swells.
On the other hand, ANZ said before the election that “there will be significant spending pressures in the current policy environment”.
“The rapid growth in NDIS spending is one example, aged care is another. These pressures will need to be managed regardless of who wins the election, especially given that significant tax reform seems off the table.”
Economic data releases featured prominently during the election campaign, with soaring consumer prices and weak wage data undercutting the Morrison government’s credentials for economic stewardship, which were brightened by April’s 3.9 per cent unemployment rate.
Ahead of the RBA meeting, the Australian Bureau of Statistics will release GDP data for the March quarter on June 1. Oster said Omicron’s disruption would mean a quarter-over-quarter figure of maybe 0.2%, but an average of 4% in 2022, before slowing to about half over the next year.
Rating agencies can also vote on Australia’s economic management, with all three of the big three – Fitch, Moody’s and S&P – showing no sign of a hasty scrutiny of Australia’s much-vaunted AAA debt rating, even if the federal government The Treasury Department expects debt to exceed $1 trillion in 2023-24.
A downgrade would raise borrowing costs, with investors demanding higher yields to buy bonds.
S&P Global Ratings analyst Anthony Walker, Said that despite rising interest costs, “Australia’s solvency is very high”, which is reflected in the “AAA” rating.
“We expect interest expense to rise from 3.8% of income to about 4.2% over the next few years, reflecting higher yields and rising debt levels,” he said.
“However, higher borrowing costs won’t have much of an impact on the budget in the short term, as some refinancing rates are actually lower than in the past.”
Jeremy Zook, head of Asia-Pacific sovereign ratings at Fitch, agreed that higher government borrowing costs would only add to “modest” fiscal pressures in the coming years.