The incoming Labor government faces a number of economic problems from rising inflation to slowing economic growth, but economists and rating agencies say those potential storms can be weathered and markets will take action.
Gareth Aird, chief economist at the Commonwealth Bank, predicted that with investors pricing in a change of government in Saturday’s federal election, the response in stocks and other markets would be “silent”.
In early trading, the benchmark ASX200 was up about a third of 1% before paring gains. The Australian dollar was also slightly stronger against the US dollar.
Who won the government? [on Saturday] He said that the night was inheriting an economy with high inflation and a very tight labor market, and thus … a central bank that had to act accordingly.
“I don’t think there is anything in what we heard on the campaign trail that will change the demand in your economic forecast in a material sense for the next 12 to 18 months.”
Chancellor of the Exchequer, Stephen Kennedy, met the new Treasurer, Jim Chalmers, at his home outside Brisbane on Sunday afternoon to deliver the government’s briefing known as the “Red Book,” the Australian Financial Review reported.
Aird expects the Reserve Bank to raise the cash rate from 0.35% at each of the next three board meetings, with the first meeting on June 7. Investors are betting on a rapid rise in interest rates as the bank attempts to dampen inflation expectations after consumer prices in the March quarter rose 5.1%, with core inflation hitting a 13-year high.
Alan Oster, chief economist at NAB Group, expects the RBA to be around 1.5% in cash by the end of the year. (A one percentage point rise in the interest rate increases payments on an average home loan in Sydney by about $500 a month and $350 in Melbourne.)
The RBA is independent of the government, as is the Fair Work Commission, which will issue its annual ruling on a minimum wage increase by the end of June – another economic signal beyond the government’s control.
Despite Thursday’s Labor costs (which revealed a net $7.4 billion in additional spending over four years) sparking some media interest on economic management, Oster said he “didn’t really notice a big difference between the two sets of policies.”
“The Australian economy is over $1 trillion a year, so an extra $10 billion is really nothing,” he said. “I don’t think it’s a bad set of books [for Chalmers to inherit]. There is a lot of skepticism globally, but locally – provided the Reserve Bank is not stupid, and I don’t think they will – then we are fine. “
Oster’s biggest three fears are slowing growth in China as that country struggles to contain the outbreak of the Covid-19 virus. Europe’s year-end goal of weaning itself off Russian oil and gas; The very rapid rise in interest rates by the US Federal Reserve is stifling growth in the US.
“The kind of fears that scare the United States, don’t scare us of Australia,” he said.
Both Oster and Aird expect the Australian dollar to rise over time against the US dollar. On Sunday, the local currency was trading above 70 US cents.
Oster said that based on higher commodity prices, the Australian dollar should trade at around 78 US cents and should approach that level next year.
It just needs one shock, said David Blank, head of Australian economics at ANZ, “to take you completely off the expected path – and in either direction, as not all shocks are negative”.
In the upcoming fiscal year, risks in the deficit outlook are currently heading to the downside, in part due to higher iron ore and other commodities prices driving up royalties and company profits.
“[The] Blank said the nominal economy appears to be much stronger than the Treasury projected at budget time, “with lower unemployment than expected to cut expenditures while inflation will boost tax revenue as the nominal economy swells.”
On the other hand, ANZ said ahead of the election that “there will be a lot of spending pressures built into the current policy settings”.
“The rapid growth in spending on the NDIS is one example, with elder care another example. These pressures need to be managed regardless of who wins the election, especially given that major tax reform appears off the table.”
Economic data releases featured prominently during the election campaign, with higher consumer prices, weak wage data weighing on the Morrison government’s economic management credentials and a 3.9% unemployment rate for April.
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 disruptions would mean the quarter-to-quarter figure could come in at 0.2%, but the average for 2022 would be 4% before slowing to about half next year.
Rating agencies can also vote on Australia’s economic management, and at the moment not all of the big three – Fitch, Moody’s and Standard & Poor’s – show any sign of a hasty revision of the country’s rating of Triple A, even with the federal debt total. The Treasury expects the debt to reach $1 trillion in 2023-24.
Lowering the credit rating will raise the cost of borrowing, as investors demand a higher return on purchasing debt.
Anthony Walker, S&P Global Ratings Analyst, He said that despite the high interest costs, “Australia’s capacity to service its debt is very high”, which is reflected in the “AAA” rating.
“We expect interest expense to rise to about 4.2% of revenue, from 3.8%, over the next few years, reflecting higher revenue and higher debt levels,” he said.
“However, higher borrowing costs will not take a large share of the budget in the near term because some refinancing is actually done at lower interest rates than in the past.”
Jeremy Zuke, director of sovereign ratings for Asia Pacific at Fitch, agreed that high government borrowing costs will only add to “modest” financial pressures over the next few years.