What Australia’s Hung Parliament Means for the Economy

Australia Economy
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Every now and then, you can’t help but wonder what life under an autocracy would be like. If you’re anything like me, you usually get this feeling whenever the shortcomings of democracy crystallise — as they did over the weekend.

Australia has woken up this morning as a nation that will, in all likelihood, remain rudderless for the next three years. Instead of meaningful reform, think status quo. Instead of progress, think stagnation.

It wasn’t enough that my local polling station ran out of ballot papers as I waited in line. For our troubles, we’ve ended up with a hung parliament — a euphemism for ‘useless government’.

At present, some 80% of votes have been counted. The Coalition has won 68 seats, to Labor’s 67. Ten seats are in doubt, and either party needs 76 to form a majority government.

Most likely, you can look forward to a minority government without the mandate to pass meaningful legislation. Whoever wins will have to cajole, beg and prostrate its way to reform.

It sure does make you pine for the efficiency of Russian or Chinese government, doesn’t it? Whatever you think of their respective leaderships, things get done. There is a long term vision that guides policymaking across these great nations. A vision that doesn’t involve bartering with the enemy to enact change.

In all honesty, I’d prefer a government that has a strategic approach to policymaking. An approach that lasts beyond the comings and goings of three-year terms. But what do I know? King Democracy has never failed us before, as the media is wont to remind us.

Either way, few people will exalt the outcome of this election, irrespective of what side of the political spectrum they sit on.

What the election means for Australia’s credit rating

If neither party manages to form a majority government, Australia’s credit rating is likely to suffer a downgrade in the coming months.

At first, there’s a strong likelihood the nation’s credit rating will be placed on ‘negative watch’ — the equivalent of a yellow card. But it might be not long before credit agencies downgrade Australia’s AAA rating to whip the government into action.

Why might this be the case? As the ABC reports:

The reasoning behind a possible downgrade would be that a minority government, of either political persuasion, is unlikely to be able to get the sort of spending cuts or tax increases needed to improve the budget through a fractured parliament.

Not that everyone thinks this would be a step in the wrong direction. According to Stephen Halmarick, of Colonial First State, the importance of the AAA rating is exaggerated:

There are not many AAA credit rating nations left in the world. The UK lost theirs last week. And so, even if Australia was downgraded, I don’t think it is going to have a big impact on increasing our borrowing costs because, although our interest rates feel like they are very, very low — they’re in fact at historic lows — [interest rates are] still quite a bit higher than the rest of the world.

So there is attractiveness of Australian interest rates for global investors.

Maybe so. But the argument that things are OK because they’re much worse elsewhere is anything but reassuring. It is true the cost of borrowing in the UK fell to a record low 0.9%, even after its credit rating was downgraded in the aftermath of Brexit. But that’s a reflection of the outrageous amount of credit floating around the global economy. It is not, by any means, a sign of strength in the UK economy. And it wouldn’t be the case in Australia either.

Reserve Bank of Australia to cut rates again…or maybe not?

The Reserve Bank of Australia (RBA) certainly didn’t need a hung parliament heading into its July meeting tomorrow. Amid the uncertainty created by both global and domestic affairs, economists are tipping a 0.25% rate cut is on the way.

In all likelihood, the RBA will put off any decision on rates until next month at the earliest. But there is consensus that a rate cut is coming — sooner rather than later. Mr Halmarick notes:

Uncertainty over the political outcome, less business investment, maybe some slippage in the budget, just means I think the Reserve Bank has to do more of the heavy lifting of trying to support the economy and that makes another rate cut more likely. We [Capital Economics] are expecting a rate cut in August following what we think will be a low CPI reading at the end of the month.

At present, markets have priced in the chances of a rate cut at 60% in August. That compares with 13% at tomorrow’s meeting. But new inflation data released this morning could put a spanner in the works, even if it doesn’t flip the switch on the RBA’s rate policy.

The Melbourne Institute Monthly Inflation Gauge spiked by 0.6% in June. That came after a fall of 0.2% in May.

Annually, the MI Inflation Gauge sits at 1.5%, which is below the RBA’s targeted 2–3%.

That would seem to contradict the inflation trend Mr Halmarick predicts. And it could put paid to any suggestion of an impending rate cut. As Melbourne Institute’s senior researcher Sam Tsiaplias notes:

We probably won’t see another negative value in quarterly inflation, and I suspect that while we might not see a big positive value, it looks like it will be a positive number, so I guess it means we won’t see two periods of negative inflation.

A lot to ponder over at the RBA, then.

Whatever happens in the short term, though, one thing is certain: Australia will not avoid the self-defeating race to slash rates to near-zero levels. The only question we need to ask is:  how fast will rates fall?

If no majority government takes shape, and a hung parliament drags out decision making, as expected, the RBA may be pushed into action more than it anticipated.

Reckless RBA, meet ineffective government. What a prosperous three years this promises to be…

Mat Spasic,

Contributor, The Daily Reckoning

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