Gas prices and crazy politicians: Saul Eslake reveals the four biggest risks to the Australian economy

Bank of America Merrill Lynch economist Saul Eslake says the Australian economy is likely to face reduced growth over the next 18 months, as local and international economic risks make it unlikely things will get better soon.

In a wide-ranging interview conducted over an Australian Institute of Company Directors lunch in Melbourne, the high-profile economist had few positive things to say about the coming economic conditions.

In his estimation, these are the four biggest risks to the Australian economy

Gas prices

Nominating this as his number one risk, Eslake said a rapid increase in gas prices could have far more disruptive effect than the carbon tax, and would be delivered with no compensation.

Global demand is why Eslake reckons prices are set to rise.

“In a couple of years, we could face a substantial increase in gas prices as Australia’s gas companies have signed contracts to export all of their gas,” he said.

Gas is expensive to transport and import, so prices could rapidly rise as a result.

This could have a large impact, particularly in New South Wales, where government policy prevents further gas exploration.

Gas is used in electricity generation, food processing and the making of construction materials, Eslake said.

Crazy politicians at home

Eslake took a shot at politics, particularly the Nationals, saying they could hamper the Abbott Government’s ability to undertake productivity-enhancing reforms.

“John Howard was lucky in that when he was prime minister, the National Party was led by Tim Fisher, John Anderson and Mark Vaile, all of whom were by Nationals standards very rational people,” he said.

“They were trade ministers who saw it as part of their job to sell free-market policies to an often sceptical, sometimes hostile constituency.

“That wing of the National Party is all but extinct.

“Now, we’ve got a situation where our country may be run by Barnaby Joyce while Abbott is out of the country. That’s frankly a quite frightening prospect.” Joyce has said he will run for deputy prime minister when current leader Warren Truss retires.

And politicians abroad…

But perhaps this is not as frightening as what is going on in America. The American Government is currently closed after the failure of its legislature to pass a budget bill. On October 17, however, the American government will hit its debt limit, and unless its politicians manage to compromise this time, the American government will default on its debts.

An American government default of even “half a day” would have “catastrophic” consequences, potentially leading to a “cold-war-life” situation in the global economy, Eslake said.

“Until about ten days ago, the conventional wisdom of financial markets was that the Republicans wouldn’t go down this road.

“But to hear the way they’re talking now, well, you have to wonder what planet they’re living on. One can only hope enough Republicans come to their senses.”

The persistently high Australian dollar

The Australian dollar is still too high, and this hinders Australia’s adjustment to the period after the mining investment boom, Eslake said.

“The dollar is just too high to encourage investment outside of mining, and we need that investment in places like New South Wales.”