Australia’s “wonder from Down Under” economy ignored recent political turmoil, but is headed for a sticky patch, putting more pressure on a weak new government to forge important reforms, economists said.
Rollicking annual growth of 3.3 percent and a low unemployment rate of just 5.1 percent mask significant problems ahead, with other indicators suggesting significant weakening, they said.
The economic storm clouds appear as Australian business urges the first minority government since World War II to settle an explosive mining tax row and end uncertainty over an anti-pollution carbon tax.
Savanth Sebastian, equities economist at CommSec Securities, said there were clear signs that the mining-powered economy, closely linked to major resources customer China, was set for a slowdown.
“If you look at the forward-looking data like dwelling commencements, retail sales, new home sales, they’re all suggesting that the economy certainly has weakened. Even car sales are coming off the boil,” Sebastian said. “So here is an economy that is going to slow in the coming months. And the high Australian dollar will also cramp the tourism sector.”
Australian Financial Review columnist David Bassanese said the country was in a “sweet spot” of post-financial crisis spare capacity, which was unlikely to last.
“Not only is productivity growth not accelerating, it has sunk like a stone,” Bassanese wrote. “Indeed, the economy faces a growing array of structural impediments that are lowering potential growth while raising the floor on inflation.”
Australia’s business community gave a downbeat reaction to Australian Prime Minister Julia Gillard’s minority government, which has a parliamentary majority of just one seat thanks to support from an eclectic mix of Greens and conservative members of parliament.
“Worst possible outcome,” thundered the Financial Review’s editorial on Wednesday, the day after Gillard’s center-left Labor scraped over the line ahead of Tony Abbott’s business-friendly opposition.
“Australians should be concerned at the outcome of the election. It is no recipe for the unpopular reforms that are needed to revive productivity and keep Australia competitive in an increasingly challenging world,” it said.
Business leaders warned that the make-up of the new government could make it harder to forge reforms.
“The economic challenges facing our nation ... are steep, and the degree of difficulty in meeting those challenges has become just that bit more difficult,” Australian Chamber of Commerce and Industry chief Peter Anderson said.
“Either we embark on the necessary economic reform agenda for our nation, one which drives productivity and competitiveness or we allow political gridlock and political in-fighting to stifle economic activity and that would lead to economic drift,” he said.
Sebastian said that for business, the “jury’s still out” on whether the new government will survive long enough to enact reforms after a major tax summit expected in the coming months.
“The big concerns will be around a carbon tax and a mining tax,” he said. “I think really those concerns will come to the forefront when the tax is being debated.”
DJ Carmichael research analyst James Wilson, a resources specialist based in Perth, said mining companies were hoping for greater involvement in shaping the new tax, which helped bring down Gillard’s predecessor Kevin Rudd.
“Hopefully the government is smart enough to realize that they only got in by a whisker, and that may make them sit down and think that the [mining] tax may be a part of that reason why they didn’t get a landslide victory,” he said.
Wilson noted that shares in the major miners dropped after the new government was announced, and were likely to “tread water” until there was greater certainty on the mining tax.
Rudd announced the mining tax in May, and was ousted in a party coup by late June after his popularity dropped in the ensuing row. Gillard watered down the levy shortly after coming to power.
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