The latest federal Morgan Poll, released last Friday, found that despite gaining some ground in recent weeks, the Federal Government still lags behind the ALP by quite a margin.

The Howard Government now trails by 13% on the primary vote (ALP – 51%, L-NP – 38%) and by 16% on a two-party preferred basis (ALP – 58%, L-NP – 42%).

However, the Howard Government currently has the economy on its side — with the large majority of economic indicators released in past months to have shocked on the upside.

With first quarter GDP estimated to have grown by 1.6%, the annual rate of economic growth is placed at 3.8%. It is obvious to all and sundry that such strong growth figures would have to correlate closely with a jump in employment — but few predicted the unemployment rate would fall to a 33-year low of just 4.2%.

This is quite reminiscent of the 2004 election — many predicted the Mark Latham-led Labor Party would trounce  the Howard Government, but the nirvana economy, and a well-timed interest-rate scare campaign, allowed the Coalition to be returned with an increased majority.

Well, as of June 2006, the Australian economy is at a much better place than when Latham was trounced in ’04. Unemployment is down from 5.1% to 4.2%; economic growth remains strong; the inflation rate is down slightly.

Furthermore, the Roy Morgan Consumer Confidence Rating, released today, shows the index remains at elevated levels, down just 0.2 points to be 122.3 in June. Of course, consumers will become even more confident when their tax cuts come into play in July.

However, some commentators consider last week’s economic indicators, particularly the labour force data, to warrant another rate hike which would hurt the Howard team. Indeed, interest rates were at 5.25% at the 2004 election; they are 6.25% now and may rise.

Of course, the one key indicator that the RBA focuses on when making their monetary policy decisions is the inflation rate — because of the newly flexible labour market, it is not impossible for the economy to be growing at such a pace, with low unemployment and low inflation.

Of course, Henry knows that the actual level of unemployment is nowhere near 4.2%. As he argued in late 2006, the are a significant amount of “missing workers” whose labour is either un- or under-utilised.

The Australian labour force participation rate remains low when compared internationally. The Howard Government is convinced that the newly re-regulated labour market will lure many “missing workers” back into the work force.

This fact, together with the Government’s labour market reforms that at least in part disenable a wage-inflation breakout, means that it is conceivable that inflation will remain at comfortable levels in the medium-term.

This will be all-important for the Government, which has backed the low-interest-rate horse from the get-go, and will not want another hike before November. 

Read more at Henry Thornton.

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Peter Fray
Peter Fray
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