Market response to Australia’s new Labor government will be ‘silence’, say economists | australian economy

The incoming Labor government faces a host of economic problems, from rising inflation to slowing economic growth, but economists and ratings agencies say those potential storms can be weathered and markets will take it in stride.

With investors eyeing a change of government in Saturday’s federal election, the response in stock markets and elsewhere will be “silence,” predicted Gareth Aird, chief economist at the Commonwealth bank.

In early trading, the benchmark ASX200 stock index 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] night was going to inherit an economy that has a high rate of inflation and a very tight labor market, and therefore… a central bank that had to act on that,” he said.

“I don’t think there is anything in what we’ve heard on the campaign trail that will change the course of his economic forecast in a material sense for the next 12 to 18 months.”

Treasury Secretary Steven Kennedy met with incoming treasurer Jim Chalmers at his home outside Brisbane on Sunday afternoon to hand him the government report known as the “red book,” the Australian Financial Review reported.

Aird predicts that the Reserve Bank will raise the 0.35% cash rate 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 dash inflation expectations after consumer prices in the March quarter rose 5.1%, with core inflation at its highest level in 13 years.

Alan Oster, group chief economist at NAB, expects the RBA cash rate to hit around 1.5% by the end of the year. (An interest rate increase of 1 percentage point increases repayments on an average home loan in Sydney by nearly $500 a month and $350 in Melbourne.)

The RBA is independent of the government, as is the Fair Work Commission, which will deliver its annual opinion on minimum wage increases at the end of June, another economic signal outside the government’s control.

Although Labor’s costs released on Thursday – revealing a net additional spending of $7.4bn over four years – stoked media attention on economic management, Oster said he “didn’t really see much of a difference between the two sets.” of policies”.

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“The Australian economy is over a trillion dollars a year, so an extra $10 billion is nothing,” he said. “I don’t think it’s a bad set of books [for Chalmers to inherit]. There are a lot of uncertainties globally, but locally, as long as the Reserve Bank doesn’t get stupid, and I don’t think it will, then we’re good.”

Oster’s three biggest concerns are slowing growth in China as the country struggles to contain Covid-19 outbreaks; Europe’s year-end goal of shelving Russian oil and gas; and too rapid an interest rate hike by the US Federal Reserve that stifles US growth.

“The kinds of concerns that terrify us outside of the United States don’t terrify us outside of Australia,” he said.

Both Oster and Aird expect the Australian dollar to strengthen against the US dollar over time. On Sunday, the local currency was trading above 70 cents on the dollar.

The Australian dollar is hovering around the US mark of 70.5 after the weekend’s election resulted in a Labor government. Economists predict the currency will strengthen against the dollar, although China’s anti-covid restrictions are among the headwinds.

—Peter Hannam (@p_hannam) May 22, 2022

Based on soaring commodity prices, the Australian dollar should trade around 78 US cents and should approach that level next year, Oster said.

David Plank, head of Australian economics at ANZ, said it only takes one shock to “completely throw it off the expected path, and in any direction, as not all shocks are negative.”

In the next fiscal year, the risks in the deficit projection are currently on the downside, in part due to the high prices of iron ore and other raw materials that raise both royalties and company profits.

“[The] The nominal economy looks much stronger than Treasury expected at budget time,” Plank said, with a lower-than-expected unemployment rate cutting spending while inflation will boost tax revenues as the nominal economy grows.

On the other hand, there will be “a lot of spending pressure built into the current political setup,” ANZ said ahead of the election.

“The rapid growth of spending in the NDIS is one example, with elderly care another. These pressures will need to be managed regardless of who wins the election, especially as significant tax reform seems off the table.”

Economic data releases figured prominently during the election campaign, with soaring consumer prices and weak wages data denting the Morrison administration’s economic management credentials and polishing them by the 3.9% unemployment rate for April.

Ahead of the RBA meeting, the Australian Bureau of Statistics will release March quarter GDP data on June 1. Omicron’s outages will mean the quarterly figure may be as low as 0.2%, but the average for 2022 will be 4% before falling by about half next year, Oster said.

Rating agencies can also vote on Australia’s economic management, and for now the Big Three (Fitch, Moody’s and S&P) show no signs of a hasty review of the country’s much-vaunted triple-A debt rating, even as federal debt. gross. The Treasury forecasts that the debt will exceed a trillion dollars in 2023-24.

A downgrade would raise the cost of borrowing, and investors would demand a higher yield to buy the debt.

Anthony Walker, S&P Global Ratings Analyst, it said that despite rising interest costs, “Australia’s ability to service its debt is very high”, 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 yields and rising debt levels,” he said.

“However, higher borrowing costs won’t hit the budget much in the short term because some refinances actually have lower interest rates than in the past.”

Jeremy Zook, director of Fitch’s Asia-Pacific sovereign ratings, agreed that higher government borrowing costs will add only “modest” fiscal pressure in the coming years.

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