With the Coalition returning to government following Saturday’s Federal election, it’s likely to be business as usual for the Australian economy.
AMP Capital Senior Economist Diana Mousina says the Coalition’s focus in the near term will remain on providing tax relief to low-and-middle-income households, which was the focus of this year’s Federal budget. This tax relief represents about 0.5 per cent of gross domestic product (GDP).
“This will help consumption, but the negatives from falling house prices are likely to outweigh the stimulus households will receive from the Federal government,” she says.
Mousina believes the Coalition will continue to concentrate on infrastructure spending, with a strong pipeline of infrastructure projects yet to be finished. This activity is likely to peak later this year. “This could mean a drop in infrastructure-related employment towards the end of this year and into 2020.”
First home buyers are also likely to receive some assistance under a Coalition government. It has indicated it will assist those property buyers with a deposit of only five per cent. This should help first home buyers to get a loan without having to take out lenders’ mortgage insurance. But it does create potential risks around lending criteria and lending to households with a smaller deposit.
Overall, the outlook for the Australian economy is relatively constrained, says Mousina. “We expect GDP growth of between only two to two and a half per cent for the next two years due to the downsides around consumption. We also believe inflation will continue to run at only two per cent.”
As a result, the Reserve Bank of Australia (RBA) is predicted to cut interest rates twice this year, with rates ending the year at about one per cent.
When it comes to fiscal policy, the Coalition is likely to run small budget surpluses during this term. The new tax rates outlined at this year’s Federal budget will likely apply from the second half of the next decade, involving substantial changes to middle-income and higher-income households. This will help combat bracket creep.
Turning to interest rate and currency markets, Andrew Scott, Senior Portfolio Manager, Macro Markets, Global Fixed Income at AMP Capital, says in the grand scheme of things, there are bigger fish to fry than the election when it comes to our economy.
“The market will still spend most of its time worrying about international trade or the unemployment rate. But there are some implications from the election outcome. For instance, there may be some movement in interest rates and on currency markets on Monday,” he says.
Labor’s pre-election proposal to intervene more actively in wage outcomes for lower-paid workers seemingly won’t eventuate now the Coalition has been re-elected. There are two ways to look at that from an interest rate perspective, says Scott.
“The RBA has been seeking higher wages for a long time, which could have lifted the unemployment rate. Right now the unemployment rate is the key factor. So with some more certainty around wages, this raises questions around the RBA’s next move, although we still expect the central bank to cut the cash rate. But overall, the Coalition’s win should support the currency, notwithstanding all the other variables at play in the economy.”
Scott notes there are many electoral cycles before the tax cuts outlined in this year’s budgets happen. As such, it’s difficult to foresee economic conditions at the time.
“Given how far into the future those tax cuts are, at the moment markets are focused on nearer term events that are driving interest rates and currencies.”
By Michelle Bowes