Australian Prime Minister Scott Morrison is talking up the health of the economy ahead of general elections set for May 18. But that upbeat message can be challenged by his political opponents and may soon be contradicted by the Reserve Bank of Australia, the central bank, as signs of an economic slowdown become more widely apparent.

Polls show that Morrison’s Liberal-National Coalition will likely lose to the Labor opposition at next month’s election, with the certain surveys putting the percentage gap at 52-48%. But Morrison is pushing back against those odds, highlighting his government’s economic management and the supposed strength of the economy as his best electoral chance to pull an upset.

In the federal budget announced in early April, Morrison trumpeted a A$7.1 billion (US$5 billion) budget surplus for 2019-20, the first for a decade, and promised to leverage the fiscal excess into sweeping tax cuts for up to 10 million Australian workers.

At the core of Morrison’s pitch is that his Coalition features better economic managers and a strong economy – reputedly witnessed in decade-low unemployment of 5% and gross domestic product (GDP) growth of just under 3% – that should be credited to his government.

While Morrison has only held the premiership since last August, he served previously as ousted prime minister Malcolm Turnbull’s treasurer, a top economic portfolio.

Australia's Treasurer Scott Morrison (C) picked as new prime minister after a Liberal party coup in a stunning upset against key challenger Peter Dutton. Photo: AFP/David Gray
Australian Prime Minister Scott Morrison in a 2018 file photo. Photo: AFP/David Gray

“You will have the choice between a government that is delivering a strong economy and will continue to do so, or [opposition leader] Bill Shorten’s Labor Party, whose policies would weaken our economy,” Morrison said, in comments he has repeated frequently on the hustings.

“You will get to decide between a government that has fixed the budget or Bill Shorten’s Labor Party that we always know can’t manage money.”

Australians still have several weeks to make up their minds on whether they buy Morrison’s shtick. But in doing so they may have another factor to consider: an interest-rate cut from the Reserve Bank of Australia, which would contradict Morrison’s economic boosterism as political spin.

The RBA has left official benchmark interest rates on hold at a record low of 1.5% since November 2016 in a sustained posture aimed at stimulating the economy. Australia’s central bank is noted for its caution on interest-rate adjustments, and is not perceived by markets as trigger-happy.

Once-buoyant housing prices, however, are falling fast while consumer sentiment and spending is likewise sagging amid household debt levels of over 100% of GDP, among the highest such levels in Asia.

Source: International Monetary Fund

Since late last year, the RBA has digested a raft of underwhelming if not worrying economic data that may now force its hand at what would be an inopportune time for Morrison’s government, that is, right before an election it is already expected to lose.

The RBA Board meets to discuss benchmark interest rates on May 7, just over a week before the election. Markets are already widely predicting a rate cut in response to deflationary data released last week.

A rate cut would signal a significant shift. The RBA persisted through 2018 with a view that the next most likely move in interest rates would be up, not down, while all its forecasts signaled that the economy and wages would grow sufficiently to drive inflation into its target range. A rate rise would have indicated the economy was growing at a pace regulators felt needed moderation.

While the labor market is strong, the RBA has had some big misses with its forecasts for growth and inflation, which show that the economy is not performing as well as some optimists, particularly Morrison, would like to think.

GDP growth for the last quarter of 2018 was an anemic 0.2% for an annualized 2.3%, compared with the RBA forecast of 2.8% which was also revised down from 3.6%.

Source: Morgan Stanley

In the minutes of its April meeting, the RBA specifically said that minimal inflation growth and an increase in unemployment would create conditions in which it would be “appropriate” to cut interest rates.

“Members also discussed the scenario where inflation did not move any higher and unemployment trended up, noting that a decrease in the cash rate would likely be appropriate in these circumstances,” the minutes said.

While unemployment data released this month were sufficiently low, headline inflation for the first quarter was unchanged and the annualized rate is now at 1.3%, down from 1.8% and well outside of the RBA’s target range of between 2-3%.

The RBA is apolitical and its mandate is purely economic. As a result, market analysts are betting the Bank will ignore any political fallout and will do what needs to be done for the sake of the economy, which may be to cut rates on May 7.

Australia’s opposition Labor leader Bill Shorten speaks during a press conference during the first day of the election campaign in Melbourne on April 11, 2019. Photo: AFP/William West

While it is apolitical, RBA governor Philip Lowe is on the record as calling for wage increases, which is one of the key tenets of the economic policy of the Labor opposition.

The RBA could well throw a bomb right into the middle of the election campaign if it chooses to cut interest rates. If that is the case, then Scott Morrison will have to change his tune, which is likely to be that the Coalition are best equipped to manage an economic downturn than his Labor opponents.

Morrison’s background is in marketing and it is clear from his campaign that he carefully sculpts his public messages. How he massages his economic assessment if the RBA cuts rates – in what would amount to a de facto no-confidence vote in the state of economy – could make or break his candidacy just two weeks before the election.