Political uncertainty dragging on growth

Political uncertainty dragging on growth

Political uncertainty following the close result of the Australian federal election is likely to be a drag on growth, adding to the list of problems the country faces in the third quarter, says AllianceBernstein.

AllianceBernstein (AB) said the close election result would make it difficult for the government to deliver structural reform, fiscal repair or budget consolidation, and AB senior economist Guy Bruten said the “possibility of aggressive fiscal stimulus” was also diminished.

Uncertainty around policy is likely to have a flow-on effect, AB said, noting that a lack of confidence in policy direction could stifle the growth outlook, and by extension the country’s credit rating.

“This policy uncertainty is likely to weigh to some extent on the growth outlook. With inflation below the Reserve Bank of Australia’s target band, the central bank is likely to deliver further policy easing, and with the rating agencies looking closely at downgrading Australia’s AAA rating, the Australian dollar is likely to come under more pressure,” Mr Bruten said.

The outlook for growth is already “subdued”, owing to an increasing divergence in macroeconomic performance and policy.

The US presidential race and Japan’s proposal to use ‘helicopter money’ are adding to this divergence, according to AB, with the UK’s decision to leave the European Union also a prime example, although Mr Bruten argued that much of the impact of Brexit would only affect the UK itself.

“While the impact of Brexit is sure to have a material impact on the near-term outlook of the UK economy, it is likely to be muted elsewhere, including non-Japan Asia, where the direct exposure to UK export linkages is small,” he said.

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