Gillard is betting on economic weakness

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The AFR’s Andrew Clarke today argues that Gillard is betting the next election on an economic rebound:

Drawing inspiration from these electoral boilovers, the Gillard inner circle of the Prime Minister, Deputy Prime Minister and Treasurer Wayne Swan, and political strategist John McTernan, formulated Labor’s election strategy over the Christmas break. To summarise, the ALP’s pitch will be not so much “it’s the economy, stupid”, but refined down to “how you feel about the economy”.

Labor is banking on the nation’s economic and consumer ducks being in alignment come election day. According to its scenario, the positive news coming out of the US and China, and even a less gloomy outlook in Europe, will spill over into more local confidence.

A rising Australian sharemarket should replenish superannuation funds, and will, Labor hopes, be matched by lower interest rates, a housing recovery and rising consumer sentiment.

Conventional wisdom is that incumbents benefit from economic good times. Is it true? Sure, it can be. But it’s much complex. Here’s the history of GDP and government changes:

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Only one of the past four changes of government have transpired during a period of economic hardship. The election of Bob Hawke in 1983. Indeed the history of government changes (limited as they are) rather suggests the opposite. That the polity is prepared to bet on someone new only if times are good enough. Paul Keating is surely the prime example. In 1993 Australia was fresh out of recession and despite the recent memory (and blame squarely placed on PK’s shoulders) the electorate stuck with him. Not until 1996 did he get booted when economic security was again the norm.

The 2001 election might also be cited. Labor has huge momentum one year out. But the world was in or close to recession (not to mention the strife of September 11 and the Tampa), and polls swung heavily towards the incumbent.

Ask yourself, had the GFC happened one year earlier, what would that have done to Kevin Rudd’s chances?

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Fact is, uncertain times aid incumbency. And perhaps Clarke might have bothered to read Gillard’s speech yesterday, which was all based around difficult not exultant times:

Despite low inflation and low interest rates, we still feel these pressures on living standards.

Superannuation returns are only just beginning to recover from the hit delivered by the Global Financial Crisis. Capital city housing prices have not grown at all in the past twelve to eighteen months, compared to the average yearly gains of eight to ten per cent in the years before the GFC.

These two impacts have us worried that our dreams of financial security are harder to achieve than ever before.

Today, we save over 10 per cent of household income. In the years before the GFC, we used to save nothing as a nation.

It was a phase that could not last – but unsurprisingly, many Australians miss those days when they could spend all of their income, see wealth increase through ever-rising house prices, and through easy credit, borrow against the house again to spend more.

Nah, Gillard is betting (rightly) that by September the economy will be weakening. That’s the advice she’ll be getting from Treasury, which is in lock-step with the RBA on the end of the mining boom. The mining investment boom will be ending. Bulk commodities will be weakening. The rebound in interest-rate sensitive sectors will be lagging. China’s stimulus-led growth will have peaked.

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Gillard is setting up to fight the election on the grounds that Abbott and Hockey are austerity nutters, prepared to slash the budget no matter what the circumstances.

She’s turning the Liberal Party’s number one strength into a political wedge.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.