Here's several views on the new government and the economy.
The Australian stockmarket's 2% rise yesterday was due more to the ill-informed rumour from China about the Chinese Government's wealth fund eyeing Rio than any applause for the election result.
But investors are not really worried: they had a chance to show their views over er the past 11 months as opinion polls moved heavily in favour of Mr Rudd and his party. The markets have ignored politics and concentrated on China, the credit crunch and other factors.
In fact it's been business as usual for investors and that's not going to change.
Here's three views on the new government and the economy:
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This is from Macquarie Equities yesterday morning:
Managing an economic boom is certainly a good problem for a government to have, but is not necessarily any easier than reducing unemployment or eliminating inflation.
So far, the approach of the political parties has been to simply maintain a budget surplus of 1% of GDP and return any additional revenue back to consumers in the form of tax cuts and one-off payments.
While this has been great for retailers, more and more analysts are questioning whether this approach remains appropriate given the current strength of inflationary pressures. We believe the new government will have to be more creative in using its strong balance sheet to ensure that it doesn’t add to cost pressures and highlight some viable alternatives such as funding an increase in superannuation or reducing business taxes and charges.
The key challenge facing the new government will be to ensure that strong economic activity doesn’t spill over into higher wage growth and inflation.
Given the acceleration of momentum in the economy and the breadth of cost pressures, we think that further interest rate increases are almost inevitable, regardless of which specific policies are enacted. Given this, we think it would be shrewd for the government to ask the Reserve Bank Governor to conduct a press conference whenever monetary policy is adjusted. This would have a number of advantages.
First, it would be an ongoing reminder that interest rates are set by an independent Reserve Bank with a clear focus on inflation, and hence may boost the potency of monetary policy. Second, it would distance the government from the rise in interest rates, which would obviously be desirable from a political viewpoint.
Similarly, if the US credit market crisis does eventually undermine global and Australian growth and the RBA had to cut rates, again it would be beneficial if an independent central banker had to explain why growth was weakening, rather than have the Treasurer appearing to shift blame to external factors.
Another issue for the next government will be the appropriate stance of fiscal policy.
The simple notion that maintaining a budget surplus of 1% of GDP at all times is the ‘cutting edge’ of fiscal policy management needs to be revisited.
HSBC chief economist John Edwards told AAP yesterday that said inflation was the biggest issue confronting the new government, and it could make spending cuts.
"Well, unquestionably, the major economic challenge, the major immediate challenge, is that core inflation is above the target band," Dr Edwards said.
"In the year to December, it was above 3%.
"This is a very considerable challenge.
"It means that everything the government decides in the context of the May Budget has to be decided with a view to rising inflation."
Dr Edwards said incoming Treasurer Wayne Swan would be likely to cut back on spending on government advertising and consultants.
"But they're relatively small," he said.
"Where the big ones (spending cuts) come from, I'm not sure."
Dr Edwards said slowing US economy was a risk, but it would be unlikely to dent Australia's economic performance.
"There's no doubt the US will slow. It's likely to have quite a slow first and second quarter next year," he said.
"My own view is it will avoid recession as a consequence of the slowdown."
Dr Edwards said global growth – which the International Monetary Fund tipped would slow to 4.8 per cent in 2008 from 5.1 per cent this year – would still be above the long-term average.
"As far as we're concerned, we're fine," he said.
"Fortunately, if there was a major economic slowdown – we can't rule out that possibility – we do have the capacity to lower interest rates and spend a little more freely."
Dr Edwards noted that Australia's major Asian trading partners such as China Japan, South Korea and Taiwan are still growing strongly.
Dr Edwards also said Labor's plan to wind back Work Choices legislation was unlikely to fuel inflationary pressures.
"I would expect it to have zero impact," he said.
"The only thing that the new government plans to do with respect to Work Choices is to, over time; repeal the provisions that provided individual contracts.
"The government intends to introduce flexibility clauses for AWAs permitting … common law contracts.
"I think and predict there will not be a great deal of difference except the most ruthless employers will be discouraged from using the (existing Work Choices) legislation to eliminate conditions without compensation."
And the AMP's Dr Shane Oliver upd
