Before Australia’s federal election last Saturday, prime minister Malcolm Turnbull urged voters to deliver a strong, majority government. “Australians seem resolutely to have ignored him,” says The Economist. The country appears to be heading for a hung parliament, although the final result may not be known for another week. But anyone hoping that an unusually turbulent period in Australian politics was over – there have been five prime ministers in the past decade – was in for a surprise.
The immediate impact on markets and the economy is likely to be short-lived, judging by the outcome of the last hung parliament in 2010. Still, the political deadlock is another reason why the appeal of the Australia investment story has faded in recent years following a long run of success.
Australia has just notched up 25 years without a recession, a streak only surpassed by the Netherlands in 2008, when it managed 103 quarters. Surging demand from China for iron ore, coal and other minerals, along with a fiscal boost facilitated by years of surpluses, saw the country through the crisis of 2008/2009.
It also helped that the central bank, the Royal Bank of Australia, hadn’t left interest rates too low for too long in the early 2000s, as all its developed-market counterparts did, economist Saul Eslake told the FT.
But now the mining boom is fading amid China’s structural slowdown, the non-mining industries and services have struggled to make up the lost ground. GDP growth has slowed to around 2.5% a year in the past few years; it regularly exceeded 4% in the 2000s. Foreign direct investment is down 50% year-on-year, says Stephen Long on Abc.net.au.
There is plenty of slack in the labour market, which along with low productivity growth is hampering wage increases. That in turn has discouraged business investment. Interest rates are at a record low of 1.75%, stoking further household borrowing – now at a world record high – and a housing market bubble. A hung parliament doesn’t change the big picture: Australia may merely have postponed, rather than escaped, a downturn.