The new Labor government faces a number of economic problems ranging from rising inflation to slowing economic growth, but economists and ratings agencies say these potential storms can be weathered and markets recover. will accommodate it.
With investors pricing in a change of government in Saturday’s federal election, the response from stock markets and others will be “silent”, predicted Commonwealth Bank chief economist Gareth Aird.
In early trading, the benchmark ASX200 stock index was up about a third of 1% before evening out the gains. The Australian dollar was also slightly stronger against the US dollar.
“He who has won the government [on Saturday] the night was going to inherit an economy that has high inflation and a very tight labor market, and so…a central bank that had to act accordingly,” he said.
“I don’t think there’s anything in what we heard during the election campaign that would materially change your economic forecast for the next 12 to 18 months.”
Treasury Secretary Steven Kennedy met new Treasurer Jim Chalmers at his home outside Brisbane on Sunday afternoon to deliver the government briefing known as the ‘Red Book’, the report reported. ‘Australian Financial Review.
Aird predicts the Reserve Bank will raise the cash rate by 0.35% at each of its next three board meetings, the first on June 7. Investors are betting on a quick rate hike as the bank tries to stifle inflation expectations after consumer prices in the March quarter rose 5.1% as core inflation was at its highest level in 13 years.
Alan Oster, chief economist of the NAB Group, expects the RBA’s cash rate to reach around 1.5% by the end of the year. (A 1 percentage point rise in interest rates raises median home loan repayments in Sydney by nearly $500 per 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 increases by the end of June – another economic signal beyond the government’s control.
Despite Labor’s costs released Thursday (which showed an additional net spending of $7.4 billion over four years) drawing media attention to economic management, Oster said he “didn’t really see a lot of difference between the two sets of policies”.
“The Australian economy is over $1 billion a year, so another $10 billion is really nothing,” he said. “I don’t think this is a bad series of books [for Chalmers to inherit]. There’s a lot of uncertainty globally, but locally – provided the Reserve Bank doesn’t get stupid, and I don’t think it will – then all is well.
Oster’s top three 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 too rapid an increase in interest rates by the US Federal Reserve which is stifling US growth.
“The kind of worries that scare us the hell out of the US, don’t scare the hell 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.
Based on exorbitant commodity prices, the Australian dollar is expected to trade at around 78 cents US and should approach that level next year, Oster said.
David Plank, head of Australian economics at ANZ, said he only needed one shock to “take you completely off the expected track – and back and forth, because not all shocks are not negative”.
Over the next fiscal year, the risks to the deficit projection are currently on the downside, in part due to high prices for iron ore and other commodities which are increasing both royalties and corporate profits.
“[The] the nominal economy looks much stronger than the Treasury had expected at budget time,” Plank said, with a lower-than-expected unemployment rate reducing spending while inflation will boost tax revenues as the nominal economy swells.
On the other hand, there will be “a lot of spending pressure in the current political settings”, ANZ said ahead of the election.
“The rapid growth of NDIS spending is one example, with elderly care another. These pressures will have to be managed regardless of who wins the election, especially since significant tax reform seems out of place.
Economic data releases figured prominently during the election campaign, with soaring consumer prices and weak wage data that rattled the Morrison government’s economic management benchmarks and the unemployment rate of 3.9% in April strengthened them.
Ahead of the RBA meeting, the Australian Bureau of Statistics will release GDP data for the March quarter on June 1. Omicron’s disruptions will mean the quarter-on-quarter figure could hit 0.2%, but the average for 2022 will be 4% before slowing to around half that of next year, said Oster.
Rating agencies can also vote on Australia’s economic management, and so far the big three – Fitch, Moody’s and S&P – show no signs of a hasty review of the vaunted triple-A debt rating. of the country, even as gross federal debt. debt is projected by the Treasury to exceed $1 billion in 2023-24.
A downgrade would increase the cost of borrowing, with investors demanding a higher yield to buy the debt.
Anthony Walker, analyst at S&P Global Ratings, said that despite rising interest charges, “Australia’s ability to service its debt is very strong”, reflected in the “AAA” rating.
“We expect interest expense to increase to around 4.2% of revenue, from 3.8%, over the next few years, reflecting higher yields and rising debt levels,” a- he declared.
“Higher borrowing costs, however, won’t eat into the budget much in the short term, as some refinances are actually taking place at lower interest rates than in the past.”
Jeremy Zook, Fitch’s Asia-Pacific sovereign ratings manager, agreed that rising government borrowing costs will only add “modest” fiscal pressure over the next few years.