(Bloomberg) — Whoever wins Australia’s election this weekend will be handed a formidable challenge: to keep an economy that’s just chalked up the longest expansion on record from running out of gas.
The country recently posted its weakest back-to-back growth since the global financial crisis and a hiring spree is showing signs of sputtering — key reasons why polls indicate that Saturday’s vote will bring a change of government. As Bill Clinton’s campaign manager James Carville famously said during the former U.S. president’s successful bid: it’s “the economy, stupid.”
Yet during the course of Australia’s election campaign, the coalition government, buoyed by a two-year surge in employment and high commodity prices, has been able to trumpet a forecast return to budget surplus to suggest all is well economy-wise. The Labor opposition, meanwhile, has remained low-key on the subject to keep the electorate’s focus on its social policy strengths.
Voters in the real world sense the economy’s fragility, particularly in the jobs market, which helps explain why wage demands remained muted even as unemployment fell. On top of that, a worsening trade war threatens Australia’s key source of prosperity: China.
Should Labor win, it will be a familiar story for the party. It almost always returns to power when times are tough or about to deteriorate: Gough Whitlam ahead of the oil crisis in 1973; Bob Hawke in the wake of a double-dip recession in 1983; Kevin Rudd and the financial crisis in 2008; and now, global and domestic economies sailing close to the wind.
For the Reserve Bank, it’s all about jobs. The charts below show why markets and economists predict the central bank will need to fire up the economy with at least two interest-rate cuts in the new government’s first year.
National Australia Bank Ltd.’s employment index, part of a monthly business survey, both heralded and consistently reflected the jobs boom of the past two years. The gauge’s plunge to the lowest level since the start of 2016 had a strong whiff of a labor market about to take a turn for the worse.
Confidence and jobs are a bit like love and marriage — they traditionally go together like a horse and carriage. But not in recent years: the surge in hiring failed to ease anxiety among households struggling with record-high debt and stagnant wages. Typically, Australians leveraged up on property and then inflated away the debt via rising prices and wage increases. That’s just not working anymore, as reflected in sentiment readings.
Capacity utilization measures how close an economy is to the level where output can no longer be increased without firms lifting their average production costs. A drop in the gauge, as seen in the above chart, likely signals a weaker jobs market — it means fewer companies expect there will be enough demand to justify spending more on equipment and personnel.
The big concern is that the rapid deceleration in economic growth is yet to ripple through the jobs data, typically a lagging indicator. Gross domestic product slipped to an annualized 1% in the second half of 2018 — the most recent data available — from near a red-hot 4% in the first half. Apply that slowdown to the labor market and it produces a nasty looking picture.
Good luck to the next government.
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