What Australia’s election means for the economy

Macquarie took a leap of faith this week which says a lot about the upcoming Australian election.

It suggests no matter who wins, or what policies they implement, the economy may not take any notice.

The equities side of the diversified financial services firm added Rio Tinto, Wesfarmers, Seek and Flight Centre to its model portfolio, while removing Telstra, News Corp and Coca-Cola Amatil.

It was a move from defensive and high-yield stocks to global and domestic cyclicals – and, therefore, a bet on the Australian economy.

This is curious, not only because there's an election looming.

Macquarie’s research arm is predicting the country will achieve just 1.6% GDP growth in 2013/14, compared with the Reserve Bank of Australia’s forecast of 2.5%.

In the Lumley Centre offices of Macquarie’s New Zealand operations, with sweeping views of Auckland’s glittering Waitemata Harbour, Macquarie Private Wealth’s Sydney-based head of private research Riccardo Briganti points to a graph depicting his firm’s Australian growth forecast.

“This growth number does not keep going down,” he says.

“We’re not saying things are bad next year and then they’re going to be even worse the year after that.

“We’re saying this is the worst that we’re going to get to – of course, I don’t know what other shocks are out there, but at the moment we’re almost saying the bad news is in the market so let’s start thinking about what happens next.

“If I thought that growth line was going to keep going down I’m not going to take on any more domestic, cyclical exposure because I’m not going to see the turnaround that happens after.”

So in economic terms, the outcome of this weekend's election – being fought between Kevin Rudd's ruling Labor coalition and Tony Abbott's Liberal-National team – doesn't appear to matter.

Tailing off
To some Australian voters heading to the polls this weekend the predicted turnaround might seem a long way off, as a decade-long mining boom winds up.

Consumer and business sentiment remains lacklustre and retail spending and home building remain weak despite official interest rates being cut to 2.5% from 4.75% two years ago.

Unemployment has hit a 12-year high and is expected to rise further, as mining company profits fall, which will domino into supporting sectors.

Even with recent gains, the Australian dollar cross rate with the US dollar has lost more than 11% since the beginning of May.

The gathering economic storm clouds over Australia have important ramifications for New Zealand, given it takes much of our exports, is a huge source of tourism and many of our listed companies, including building behemoth Fletcher Building, are heavily-exposed to market conditions across the Tasman.

The economic policies of Australia’s main political parties have been front and centre leading up to Saturday’s election.

Kevin Rudd’s Labor Party has announced a rescue package for the automotive sector and help for agriculture, as well as an investment-encouraging low-tax zone for the Northern Territory.

Tony Abbott’s Liberal-National coalition has pledged to cut the corporate tax rate to 28.5%, from 30%, and says it will scrap controversial taxes on mining profits and carbon emissions. It also wants to introduce a controversial and expensive paid parental leave scheme.

Asked about the efficacy of those policies, Mr Briganti says there are upsides and downsides to many policies, but without details of budgets and potential offsets it’s hard to gauge their effect.

Economic questions
He questions the basic economics of Labor’s promise to prop up the dying automotive manufacturing sector – while admitting there may be good social policy reasons to support specific regions.

Regarding Liberal-National promises, he says removing a tax will undoubtedly help the bottom line of resources companies.

But he quickly adds that’s not always a good thing.

“There are obviously some unintended consequences of these types of policies whereby there may be marginal players who get supported but maybe it would have been better if they were taken over or disappeared completely.”

Government policy will probably work at the margins, he says.

Specific policies will affect companies in certain sectors at certain times but politics is generally not a major driver of equity market trends.

“It’s the deeper, structural drivers that are going to determine whether the resources sector does well or does poorly.”

An Australian mining tax is one thing but the commodities demand from China is quite another.

Taking an overall view, Mr Briganti says consumer sentiment is “not terrible”. Maybe tight-fisted consumers being unwilling to take on more debt is a good thing; that the growth is more sustainable.

For Australia's GDP growth, the problem is not the consumer, he says – the problem is business investing other than mining has not come back. But, perhaps, given the age of manufacturing equipment and a lack of recent investment, a turnaround in business investment is coming.

Mr Briganti says the fact there will be an outcome in this weekend’s election – no matter who wins – should lift business sentiment.

On this point, he says he was “gazumped” by a front page story in Friday’s National Business Review print edition, which reported other economists saying the same thing.

“I agree entirely with that, what I will add is: I reckon the Liberal-National coalition will take office.”

dwilliams@nbr.co.nz