Political Pandemonium

Principal Economist's View

There is no other way to describe this week than pandemonium, political pandemonium. In any other week, Tuesday’s revelation that President Trump’s lawyer Michael Cohen pleaded guilty to breaking campaign finance laws, combined with the conviction of Mr Trump’s former campaign manager, Paul Manafort, on eight counts of fraud would have dominated the headlines; especially because Cohen implicated the President in his crime. While Trump cannot be indicted as President, the fallout of Cohen’s allegations could be that upcoming mid-term elections in the US could end up being a vote on whether or not to impeach the President. But this has not been any other week.

All eyes in Australia were squarely focussed on Canberra, where internal ructions within the Liberal Party led to a leadership spill on Tuesday. The conservative wing of the party, led by Peter Dutton and former Prime Minister (PM) Tony Abbott brought a leadership challenge against Australia’s PM Malcolm Turnbull. While Turnbull survived on Tuesday, by the end of the week it became clear that he had lost the confidence of his party. However, after days of jockeying for power, the move by Dutton backfired, failing in his attempt to win the leadership of the party on Friday. Instead, Treasurer Scott Morrison (who had the backing of Malcolm Turnbull) was voted as the leader of the Liberal Party by 45 votes against 40 votes for Peter Dutton. As a result, Scott Morrison became Australia’s 6th Prime Minister in a decade.    

What does this mean for the economic outlook in Australia? With Morrison a key ally of Turnbull and heavily involved in the government’s economic policies, the election of Morrison is likely to do little to fundamentally shift the economic direction and budget policies of the Liberal Party. Financial markets have reacted accordingly, with the Australian dollar recovering much of its lost ground on news of Morrison’s win and little change in bond and equity markets over the week.  

However, given the turmoil within the Liberal Party, a number of key policy issues facing voters are no longer so clear cut. On tax policy, in his dying days former PM Turnbull scrapped the government’s proposal to cut the corporate tax rate for large businesses (with revenue >$50m). This was a key differentiator between the two major parties and given its apparent unpopularity in the electorate, Morrison may keep it on the scrap heap to nullify one of the difficulties the Government was facing in the lead up to the election. While he was a key architect of the corporate tax cuts, Morrison will no doubt blame the composition of the Senate for the shift in policy and use the savings (around $35 billion over a decade) to offer more politically popular policies in the lead up to the election. 

On energy policy, which has been a bone of contention for the fractured Liberal party, it is unclear how Morrison will proceed. After forcing Turnbull to drop legislating the National Energy Guarantee’s (NEG) emissions reduction target, the conservative wing of the party is likely to continue to advocate against emission reduction policies and instead focus on ways to reduce prices. With former energy minister Josh Frydenberg elected as the new deputy leader of the Liberal Party, Morrison may continue to push for a NEG but will most likely need to water it down to appease the conservatives in his party. Labor, in contrast, will likely go to the election with its own version of the NEG, but with a much higher emissions reduction target than originally proposed by Turnbull.          

Given the apparent tensions between Morrison and the conservatives within the Liberal Party, the new PM will face a difficult task to unite the party ahead of an upcoming election. An even bigger challenge for Morrison will be to lead his party to victory at the next election, with the fallout from the spill in Canberra this week likely to prove very unpopular with voters. Needless to say, the odds that Labor will win the next general election (whenever it is held) have clearly increased.

However, equally concerning for both major parties is that the turmoil in Canberra may push voters towards minor parties and populist politicians, resulting in an ongoing dysfunctional senate. This polarising political spectrum in Australia has been one of the key challenges confronting former leaders to pass legislation, including Kevin Rudd, Julia Gillard, Tony Abbott and Malcolm Turnbull. No doubt it will remain a test for future leaders, be it Scott Morrison or Bill Shorten.    

Table 1: Financial market movements, 16 - 23 August 2018

Equity index

Level

Change

10-yr government bond

Yield

Change

Foreign exchange

Rate

Change

S&P 500

2,857.0

0.6%

US

2.83%

-4.0 bps

US Dollar Index (DXY)

95.67

-1.0%

Nikkei 225

22,410.8

1.0%

Japan

0.10%

-0.2 bps

USD-JPY

111.29

0.4%

FTSE 100

7,563.2

0.1%

UK

1.27%

3.0 bps

GBP-USD

1.281

0.7%

DAX

12,365.6

1.0%

Germany

0.34%

1.9 bps

EUR-USD

1.154

1.4%

S&P/ASX 200

6,244.4

-1.3%

Australia

2.53%

-2.3 bps

AUD-USD

0.725

-0.2%

Source: Bloomberg

 

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