Australia's federal election on Saturday has yet to produce a winner but regardless of the outcome, a period of political uncertainty risks confidence, efforts at budget repair as well as key pension and property reforms.
Neither major political party has secured the 76 of the 150 seats in the House of Representatives, as the lower house of parliament is known, that are needed to form a majority government. With 80 percent of the vote counted as of Monday morning, the Coalition had 65 seats, the Labor Party had 67, other parties had five seats and there were 13 undecided seats. Counting was set to resume Tuesday but strategists were increasingly warning of a "hung parliament" scenario, where neither party could govern with a majority.
"Whichever party forms the government, the lack of a strong majority (or maybe governing from minority) is likely to make a reform agenda more difficult," Paul Bloxham, HSBC's chief economist for Australia and New Zealand, summed up.
The incumbent Coalition, led by Prime Minister Malcolm Turnbull, is composed of two major political parties: the Liberals and the Nationals. Since taking power in 2013, Coalition has been criticized by the opposition Labor Party for its crackdown on immigration, delayed personal income tax cuts and its proposal to reinstate a building industry regulator.
"Even if Coalition manages to secure a majority Government, it will have materially less influence in the Senate and insufficient numbers across both houses [of parliament] to pass the legislation, which was the trigger for the early double dissolution election," warned Goldman Sachs economists in a Monday note.
In this scenario, the Coalition may be unable to pass this year's budget, the $18 billion worth of unlegislated savings from previous budgets, and its flagship policies on corporate tax cuts and superannuation, the note added.
Essentially, a Coalition win would mean more of the status quo, echoed Shane Oliver, head of investment strategy and chief economist at AMP Capital.
"The end result will be poor prospects for getting government spending and the budget deficit under control over the next three years and for the Coalition implementing its policy to cut corporate taxes, let alone undertaking serious productivity enhancing economic reforms," Oliver warned.
A Labor victory, meanwhile, would imply a slower pace of fiscal consolidation, a higher budget deficit on the back of increased public spending, restrictions on a major driver of home price appreciation—a tax move known as negative gearing—and an official investigation into the banking sector, explained Goldman Sachs.
The situation is further complicated by the fact that the election's final outcome will be influenced by negotiations the parties must undertake with an increasingly powerful slew of populist micro parties and independents that hold competing priorities.
A significant rise in voting for minor parties, which hit a record 23.2 percent of the primary vote at this election, was a key factor behind the tight race, noted HSBC.
Current political instability could extend for months and another election later in the year couldn't be ruled out, which may hit overall spending by households and businesses, observed Goldman Sachs. IG market strategist Angus Nicholson echoed the warning, saying that a hung parliament's ability to carry out any major reforms to superannuation, negative gearing or corporate tax rates was low, which meant consumer and business confidence could be at risk.
The world's twelfth-largest economy, rich in natural resources, has been recession-free for more than two decades but as the global commodity rout continues, Australia faces low inflation, diminished wage growth and a spiking debt-to-gross domestic product (GDP) ratio as it transitions into a service-based economy.
As a result of Saturday's tight vote, the Reserve Bank of Australia is expected to maintain its wait-and-see attitude and keep interest rates on hold for the second consecutive month at its Tuesday review, but economists widely expect more easing in August.
Many have also predicted Australia's sovereign AAA credit rating, ranked as stable, would be placed on negative watch following the weekend's election. But on Monday, Moody's stated that political uncertainty would only have limited credit implications for Australia.
"The electoral outcome would affect the sovereign credit profile only if it changed broad policy priorities and the effectiveness of their implementation," the agency said in a statement.