What does Australian election mean for the economy, China relations and winning sectors?

The Labor Government plans to expand fiscal expenditure to alleviate rising living costs and to support growth. It plans to expand health care programs on Medicare, childcare subsidies, housing support to improve affordability, as well as more funding for elderly care. In addition, during the campaign the Labor party announced tax cuts, to minimize the impact of growing inflation on household income.

PM Albanese is following other Western countries’ industrial policy push. More specifically, it intends to provide AUD 15 bn under the National Reconstruction Fund to rebuild the manufacturing sector. One of the key policy changes for the Labor Party is to move away from Australia’s label of a climate change lagger to a front-runner. In that context, the new government intends to expand renewable resources to reduce 43% emission by 2030, which is expected to spur AUD 76 bn in related investment.

The other side of the story is obviously the financing of all of these expenditures/investments. The Labor government doesn’t intend to raise corporate taxes. This suggests that fiscal revenues will be sensitive to the resilient commodity prices and labor market. Furthermore, with rising interest rates, the borrowing costs of a larger fiscal deficit will increase.?

Against this background, the success of PM Albanese’s programs will depend on its ability to (i) attract foreign investment; but also (ii) to lift productivity which has stagnated over the past few decades (Chart 1). Such increase in productivity is the basis for a stable, if not increasing, potential growth.

On the relationship with China, the Labor Party’s stance does not seem to be too different from the Conservative Party but so far, the narrative has clearly been less aggressive. This has clearly helped Albanese to gather the votes of Australians with Chinese heritage. In any event, Australia’s commercial dependence on China seems to have waned somewhat as we moved towards a new commodity cycle, clearly favoring Australia (please see?China’s trade strategy with Australia Hit without hurting yourself). Finally, PM Albanese does not seem inclined to change its security agreement with the US (through Australia, the United Kingdom, and the United States partnership, AUKUS) or the Indo-Pacific (through the Quadrilateral Security Dialog, QUAD), which is the very first meeting PM Albanese has just attended in Tokyo can arguably afford to take a closer position with the US. In fact, PM Albanese’s first.

Regarding the sectoral implications, the election outcome is supportive of the already strong interest in infrastructure and commercial properties and, more importantly, creates a substantial boost for green energy. The Labor Party also plans to bring stronger industrial policies to nurture advanced manufacturing with a special interest in electric vehicles and hydrogen technologies. But the other side of the coin is traditional energy and industrial giants may face headwinds with emission caps. The ultimate impact will depend on how quickly the Labor Party can bring down the cost of clean energy (Chart 2a?and?2b).

The trend that the RBA will tighten monetary policies faster should not change after the election. Still, we should expect more support in home affordability due to the astonishing home price increase after the Covid-19 related liquidity injection, especially for first-home buyers. The Labor Party has proposed the shared-equity scheme for first home buyers, to which the government would contribute up to 40% of the house price for new homes, and 30% in the secondary market, with an annual quota of 10,000. While the scheme can be helpful for home affordability, it is less supportive of prices than the proposal from the Coalition that buyers can invest up to 40% of their super to purchase their first home, capped at AUD 50,000.

All in all, Australia’s election results are tilting the country towards a more inclusive and green economy at the cost of a higher fiscal deficit. However, if the plan is successful and Australia increases its potential growth, this is good news for the future economic trajectory.

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