Political uncertainty to weigh on Australian economy

Economists Monday warned a hung parliament risks Australia's coveted AAA credit rating with the inconclusive result of weekend elections seen as bad news for the economy and investment markets.

A final outcome from the polls won't be known for days, if not weeks, with millions of postal and absentee votes still to be processed, which could prove crucial in a race too close to call.

It adds to the global trend of rising political uncertainty, amid concern about Donald Trump's run for the White House and Britain's vote to leave the European Union.

Despite this, markets were undeterred with the benchmark ASX/200 only marginally lower at 5,235.4 in morning trade while the Aussie dollar was down 0.4 percent at 74.66 US cents.
So far Prime Minister Malcolm Turnbull's Liberal/National coalition and the Labor opposition both have 67 seats, the Greens one and independents four, according to results from the Australian Broadcasting Corporation.

That leaves 11 seats to be decided with 76 needed to rule outright in the 150-seat House of Representatives, raising the prospect of a second hung parliament in three years, where neither side can form a majority government.

Instead, support would be needed from often obstructionist minor lawmakers. A similar scenario is forecast for the upper house Senate, which does not bode well for getting legislation passed, potentially causing policy gridlock.

Economists said this could stymie efforts to rein in debt and deficits, undermining business and consumer confidence with repercussions for the economy.
"Even if the coalition does win government it won't have control of the Senate with the balance of power remaining with the Greens and minority parties which will act as a huge constraint on the government," said AMP Capital chief economist Shane Oliver.

"The end result will be poor prospects for getting government spending and the budget deficit under control over the next three years and for the coalition implementing its policy to cut corporate taxes let alone undertaking serious productivity enhancing economic reforms."

- Policy paralysis -

Australia is one of only a handful of nations to hold the top AAA credit rating from all three major agencies, having dodged recession during the global financial crisis.
They have yet to pass judgement on the weekend polls but Oliver said political uncertainty never boded well.

"Whoever wins it means that the risk of a sovereign credit rating downgrade has increased further," he said, in a view echoed by leading independent economist Saul Eslake.

"I don't know whether any of them will formally downgrade Australia's rating, or put Australia on a 'negative watch', but I wouldn't be surprised if at least one of them does," he told the Australian Financial Review.

A downgrade would mirror what happened in Britain in the days after its decision to exit the EU, due to the economic uncertainties.

Generally, losing a AAA rating means the nation would be forced to pay higher interest on its debt.

TD Securities analyst Annette Beacher said hung parliaments had never historically been conducive to good governance and policy reform and "the risk of losing AAA/stable is not insignificant".

"There is a significant probability that Australia experiences another three years of fiscal policy paralysis," she said, adding that it would leave the Reserve Bank of Australia "as the only public authority with tools to manage the business cycle".

The central bank holds its monthly board meeting on Tuesday. With rates already at a historic low of 1.75 percent, most economists do not expect it to intervene again just yet. 

But they see a possibility of a cut to 1.5 percent in August should official inflation figures continue to point to benign price pressures, a sign of a flagging economy.

Source: AFP