Global economic conditions appear to be improving, but Australia's new government will need to take action to stimulate inflation and lead reforms, says Standard Life Investments.
In a note to investors, Standard Life Investments chief economist Jeremy Lawson said data from the eurozone, the US and China indicate more favourable economic conditions, as evidenced by improving global growth and asset price returns.
“The realisation that the global economy is not entering recession, expectations that global monetary conditions will remain very easy for a considerable period of time and the halt to the dollar’s up-swing, has propelled a broad range of asset prices higher in recent months,” he said.
However, Mr Lawson cautioned that several challenges within the Australian economy are persisting – notably the low inflation rate – and the recently-elected government will have to step in to rectify these issues.
“[The] RBA has been forced to do too much of the heavy lifting to support economic rebalancing while successive governments have avoided reforms and pursued the wrong fiscal mix,” Mr Lawson said, adding that the RBA’s easier monetary policy may potentially be “storing up systemic problems for the future”.
“Easier monetary policy has supported growth, but also come at the expense of ever higher dwelling prices in some cities, squeezing affordability for new buyers,” he said.
Mr Lawson said it is critical for Australia’s federal government to address these issues "at source", noting that policymakers are "not short of ideas" about reforms but added that it would take a brave government to implement them.
“Courage will be needed to enact change and persuade both voters and a potentially hostile Senate of its necessity. The recovering global and domestic economy provides a window of opportunity to implement change. If it is wasted, adjustments will eventually have to be far more severe,” he said.