As a developed market economy, Australia isn’t alone in facing near-term headwinds.
Externally, the nation’s three largest trading partners—China, the United States and Europe—are challenged by slowing economic growth and/or political disruption.
Domestically, consumption has been grinding lower as high household debt, a near-zero savings ratio and low wage growth have constrained spending. It had become hard to identify catalysts that could drive a turnaround in the short term.
That was until the Liberal-National coalition government confounded expectations by beating the Labor Party in parliamentary elections this May. At the least it removed a number of negatives that had been stifling investor sentiment.
It’s not what the coalition plans to do as much as what it doesn’t. Labor was seeking to limit negative gearing, remove tax refunds on franking credits and halve the discount on capital gains tax.
These policies would have prevented investors from deducting losses against income tax, and would have eaten into retirement savings and disposable incomes. It would have lumped a negative wealth effect onto an already stressed consumer and weakening economy.
But following its surprise victory, the coalition can press ahead with tax cuts and infrastructure spending—which should give consumption and business confidence a boost. Already we are seeing a pick-up in business activity and new orders.
We have also seen both the Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia loosen borrowing conditions. This should further support consumption and underpins the country’s improved economic outlook.
While rate cuts aren’t great for banks’ net interest margins, APRA has issued guidelines to cut the minimum lending requirement as a means to stimulate credit growth. This promises to be positive for banks over time.
The retention of negative gearing and capital gains tax add to reasons why we are more optimistic about banks’ medium-term prospects.