By Rajiv Biswas, Asia Pacific Chief Economist, IHS Global Insight
Key Points:
- Although the byzantine vote counting process has still not been completed 5 days after the election – with the official result potentially taking several more weeks of vote counting – it is clear that the Liberal/National coalition will either have to try to form a minority government or may scrape through with a wafer-thin majority.
- The implications for the Australian economy are that the incoming government will be severely hamstrung in its ability to pass significant new legislation or make major economic reforms.
- The Australian economy is expected to face significant economic headwinds during the 2016-17 financial year due to the moderation of Chinese economic growth, the slump in global commodity prices, and the end of the Australian mining investment boom.
- Based on forecasts using our global economic model, IHS projects that Australia’s GDP growth rate will moderate from 2.8% in 2016 to 2.3% in 2017.
- If the election result creates legislative gridlock in the Australian parliament, the government is unlikely to be able to pass essential legislation for significant fiscal reforms, endangering the medium-term fiscal outlook.
- The 2016-17 Australian Budget, which had been announced in the lead-up to the election, had set out a medium-term roadmap for fiscal consolidation, planning to reduce the Australian government budget deficit from AUD 39.9 billion in 2015-16 (-2.4% of GDP) to AUD 37.1 billion in 2016-17 (-2.2% of GDP) and to gradually return to surplus by 2020-21.
- The major international rating agencies have warned that Australia’s AAA sovereign credit rating could be at risk of being downgraded if the Australian government is unable to effectively pursue fiscal consolidation to reduce the budget deficit. S&P has today downgraded Australia’s sovereign credit rating outlook from stable to negative.
Australian Election: Assessing the Economic Impact
The Australian economy is facing significant headwinds from China’s economic slowdown as well as the slump in global commodity prices. The 2016-17 Australian Budget, which had been announced in the lead-up to the election, had set out a medium-term roadmap for fiscal consolidation, reducing the Australian government budget deficit from AUD 39.9 billion in 2015-16 (-2.4% of GDP) to AUD 37.1 billion in 2016-17 (-2.2% of GDP) and to gradually return to surplus by 2020-21.
However, if the election result creates legislative gridlock in the Australian parliament, the government is unlikely to be able to pass essential legislation for significant fiscal reforms, endangering the medium-term fiscal outlook. The major international rating agencies have warned that Australia’s AAA sovereign credit rating could be at risk of being downgraded if the Australian government is unable to effectively pursue fiscal consolidation to reduce the budget deficit. Standard & Poor’s have today downgraded Australia’s sovereign credit rating outlook from stable to negative on concerns that the political gridlock could prevent the Australian government from significantly narrowing the fiscal deficit over the medium term outlook.
There are also additional economic challenges looming, including a major negative shock to Australian manufacturing due to the closure of all remaining auto plants by 2017. The Ford Australia car factory in Broadmeadows and the engine plant in Geelong will close in October 2016, and GM Holden and Toyota Australia will close their remaining Australian auto plants by 2017. In addition to the direct manufacturing job losses due to these closures, there will also be additional job losses for other manufacturing firms that are suppliers of goods and services to the Australian car manufacturing industry. Total employment in the Australian manufacturing sector has already declined from 13.4% of the total employment in 2005 to 7.8% by 2015, with further declines in manufacturing sector employment expected following the auto plant closures.
The mining investment boom that occurred since 2011 is also gradually fading out, as the total value of resource projects under construction or committed in Australia will decline sharply after 2015-16 due to the completion of a number of major LNG projects including Gorgon, Wheatstone and Ichthys. The slump in mining investment is projected to be very substantial over the next financial year. Expected new mining capital expenditure for the financial year 2016-17 is estimated to fall by 32.1% compared to the previous financial year 2015-16, according to latest Australian government capital expenditure survey estimates.
Consequently, Australia is facing an increasingly difficult medium-term outlook that will require significant reshaping and restructuring of the economy. However, if the Australian government is heavily constrained in its ability to implement economic reforms, this could significantly undermine global investor confidence in the Australian economy while legislative gridlock persists.