3 July 2016
Stephen Koukoulas on the economy: goodbye to the AAA rating
For the economy and markets, the election result is not good news. Not only will there be weeks where the result is unknown, but the prospects for economic policy reform must be limited with what looks like a ragbag of minor parties and erratic independents in the Senate.
Whether it is a hung parliament or a wafer-thin win to either side, the political process will be about tactics and not so much about policy. There is even a chance that voters will go back to the polls before year end if neither side can guarantee supply once the House of Representative resumes.
Making matters more problematic, the budget position is showing a harsh reality that the budget deficit has blown out since the budget with low inflation and wages growth hurting revenue. Already fragile global conditions have been dealt a major blow with the success of the Brexit vote in the UK.
The new treasurer has a difficult choice – accepting a significant budget deficit blowout for the sake of protecting economic growth and employment, or tightening fiscal policy to meet the budget surplus plans.
It is a scenario that the triple-A credit rating will certainly have a “negative outlook” attached in the not too distant future. Pragmatic economic policy action will be needed, but by whom? Will any reforms pass the Senate?
A credit rating downgrade is now very likely and a hard landing for the economy is an increased possibility as consumers and business react cautiously to the political impasse.