The AUD sunk and then rebounded again on political developments this week. The ascendency of Scott Morrison to PM offers the ruling party a road to redemption. Morrison comes from the most senior ministry role of Treasurer and has built a strong reputation as a pragmatist in controversial posts in immigration and social services ministries. He is more conservative than the former PM Turnbill and has the best chance of uniting the factional divide in the Liberal-National Coalition. The combatants in the factional and personal vendetta that gripped the party in recent years culminating it the dethroning of another PM have been weakened, allowing space for Morrison to assert authority and show badly needed leadership. The market had feared a lurch to a populist far-right anti-immigration government largely doomed to lose an election to a Labor party that has drifted further to the left. A national election still looms in six months, policy paralysis will not be easily fixed, policy uncertainty remains, but Morrison presents a better chance of lifting the standard of government either as a leader or from the opposition after the next election.
Policy and Leadership Malaise
In the last week, the AUD has dropped and now recovered to a significant degree on political upheaval in the ruling Liberal-National Coalition (LNC). The party strife has been a combination of a battle between the hard right and moderates in the main conservative political coalition in Australia, and a personal act of revenge where the former PM and party leader, Tony Abbott, appears to have been driven to topple his nemesis and the most recent former PM Malcolm Turnbill.
The issue for the AUD is that the battle scuttled what appeared to be a reasonable compromise on providing a longer-term energy policy that might help provide the certainty needed to encourage investment in the sector. The Australian economy has had to weather a spike in and volatile electricity prices in recent years blamed on inconsistent policy on carbon emissions discouraging investment in the sector over the last decade.
Neither major party has been able to command a clear majority in parliament for several election cycles and the Senate (lower house) has been hopelessly splintered into special interest groups. The Senate and the major parties in the House of Representatives have been excessively motivated by polls and controlling the 12-hour news cycle. Good medium-term economic policy has been even more neglected than normal. It has been this way for a decade, and the Australian public and business has become increasingly exasperated by politicians spending too much time on politics rather than policy.
The most recent leadership battle appears to have been the worst kind of pointless politics at the expense of policy in a decade of pointless politics. It may be wishful thinking, but a growing public backlash might snap the politicians out of their bubble. Perhaps the public may also become more concerned with economic policy and force politicians to start making sensible policy to win their votes.
The problem for the Australian economy is that it still does not have an energy policy, and the government has lurched towards the populist direction of trying to force electricity providers to cap and cut prices. This will hardly get to the nub of the problem – a long-term strategy that balances the need for secure power supply and lower carbon emissions. The ruling Liberal-National Coalition has also failed to deliver its policy of extending company tax cuts to large companies and the last act of the now jettisoned leader, Turnbill, was to ditch this policy.
The new PM and LNC party leader, Scott Morrison that won a party vote on Friday, has landed at the head of a party that appears to lack a clear economic policy platform around six months from a national election. It is going to be hard for him to convince the public that he has the confidence of his party and a vision and drive to set a consistent and sustainable policy direction for the nation.
His party members will remain more concerned by holding onto their seats in the next election, and Morrison will, of course, be under attack from the main opposition Labor party as the latest leader of a divided rabble. Both major parties, and the minor parties - the left Greens and far-right One Nation - are likely to be drawn to populist agendas and the 12-hour news cycle to win the next election. So the chances remain low that Australia will quickly recover from a decade of policy malaise.
Australian Economy at Cross-Roads
The Australian economy has done well despite the poor political environment over the last decade. The political parties have at least been focused enough on maintaining reasonable fiscal balance, even though governments have consistently pushed back their projections for returning the budget balance to surplus. The country appears to have benefitted by the rise in wealth of the Asian region driving foreign investment into Australian property and generating growth in education and tourism services. And of course, the nation has reaped the benefit of demand for its iron ore coal and gas resources. A decade of rapid immigration has helped generate economic growth, but now it is also straining infrastructure in major cities.
However, there have been a number of policy failures that may have left the economy less prepared to deal with the challenges ahead. These include energy infrastructure, and it appears to have plundered a lot of capital on national broadband that still leaves its telecommunications clunky and expensive. As countries abroad move to make their corporate tax systems more competitive, Australia is being left behind.
Australian households are highly indebted, and housing prices are expensive relative to incomes. Somewhat belatedly, the major cities are dealing with updating transport infrastructure, but development in cities still appears to lack long-term planning, and confidence in public policy is low.
Morrison a positive surprise
The AUD has bounced on the choice of Scott Morrison as the new leader of the LNC and PM. He is a positive surprise after it appeared that the initial challenger, Peter Dutton, might get the job. Dutton was the first choice of the hard right conservatives in the party. He lacked economic policy credentials and offered up a widely panned idea of removing the Goods and Services Tax from electricity prices that appeared entirely populist and bad policy.
His ascendance would have appeared to be a lurch to the populist right aimed at fighting the next election on cutting immigration and fuelling xenophobia along the lines of Trumpism, the Afd in Germany, National Front in France and UKIP in Britain. None of which would help deal with the economic policy challenges faced by the economy.
The new leader, Scott Morrison, comes from the Treasury portfolio and has developed a reputation as a steady pragmatist in both his former ministries of immigration and social services. He appeals to the hard right in his party, having successfully executed a hardline policy on reducing desperate immigration via boats, but has not aligned himself with a broader anti-immigration viewpoint.
Importantly, he was loyal to the former PM Turnbill until he removed himself from the race and thus can stand above the pattern of party in-fighting that has turned off the public in recent years.
He is not entirely above populist policies that might undermine markets. But in most instances, he appears to have balanced what is achievable with what is practicable.
He is the LNC best chance to bring unity between moderates and hard right conservatives within the party and guide a reasonable path to practical if not entirely desirable economic policy.
As such, he is also the best chance of leading the LNC to a reasonable showing and possible victory against the Labor Party that has led in the polls for around two years.
It might be too optimistic to say he represents a fresh start that will bring a new era of party continuity. But it is possible; he has a low bar to rise above, and early success could strengthen his had.
The other challenger, Dutton, appears set to return to the ministry in his previous portfolio, a sign of healing in the factional dispute.
It could be argued that former PM Turnbill’s failing was a lack of will and strength to contain the sniping and factional divide in his party. Morrison comes to the post with much less baggage, and the combatants in the Turnbill/Abbot moderate/hard right wings of the party have been wounded and have lost their strength to do battle again. Morrison appears to offer the right balance for the conservative party and has the strength and intellectual capacity to unite the party. He may help lift the standard of government. As such, his ascendency should help support the AUD.
If Dutton had won the leadership battle the outlook for stable government would have deteriorated, and the AUD would have been under sustained downward pressure, in our view. The ascendency of Morrison should continue to help the AUD stabilise with upside potential should he perform well in the role.
The market will, however, remain circumspect on AUD assets through the next election, looking on both major parties to prove they can rise above petty politics and set a stable policy course that supports business and consumer confidence.