Was that the sound of the economy hitting a brick wall?

Thu, 06 Apr 2017  |  

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/sound-economy-hitting-brick-wall-013818115.html 

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Was that the sound of the economy hitting a brick wall?

Thump!

Was that the sound of the economy hitting a brick wall?

It looks like economic conditions have deteriorated in the early months of 2017 which means the government’s efforts to ramp up its preparations for the budget on 9 May are being undermined. As Treasury works through the latest numbers on government revenue and spending, it is having to put in weak numbers into its forecasting spreadsheet that will constrain its efforts to get the budget back into surplus within the next few years.

The economic news is starting to be of such concern that perhaps the budget deficit is dropping down the order of policy concerns, particularly if, as seems likely, the looming housing slump acts as a trigger to undermine consumer spending and the economy more generally.

Of most concern has been the stalling in employment growth and rise in the unemployment rate to just below 6 per cent. Linked to that is the rise, to a record high, for the underemployment rate. Just under 2 million people are currently unemployed or underemployed which is not only a social problem, but a macroeconomic one. Not working at all or not enough hours means there is a significant part of the workforce being underutilized, not earning – and spending – their wage and in doing so, getting the perpetual motion of economic growth entrenched.

At the same time, growth in wages is at a record low which has feed into the slump in retail sales growth which in February which recorded one of its weakest months in almost 17 years. Business investment remains sluggish, despite reasonable levels of business confidence, and credit growth continues to weaken. The only bright area for the economy is the strong performance of export volumes.

And even on this score, there are some worries starting to build. The surge in commodity prices that was evident during 2016 is starting to go into reverse. The iron ore price is now 15 per cent down from its recent high while coal prices have dropped around 30 per cent in recent months, both of which will pare back the gains to national income from what was a promising commodity price pick up.

A strong Keynesian would argue that these are not the circumstances where spending cuts and tax increases – the main means to return to budget surplus – are appropriate. Indeed, the case could be made for constructive fiscal stimulus to ensure the growth momentum of the economy picks up and the negative news on jobs and inflation reverses.

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Could tax cuts threaten our AAA credit rating?

In just over 10 weeks, on 8 May to be exact, Treasurer Scott Morrison will deliver the 2018-19 budget - almost certainly the last before the next election.

The budget is likely to offer mixed news, but encouragingly remain on target to a small budget surplus in 2020-21.

Importantly, from both an economic and political perspective, there has been some upside to government tax receipts since the mid year economic and fiscal update was published in December. This is largely the result of company tax receipts running strongly as profits and therefore tax payments have been buoyed by higher commodity prices, boosting the financial position of mining companies. Strong employment growth has kept income tax payments flowing freely to Treasury, despite soft wages growth.

If the current speculation from Canberra is correct, and it appears to be well founded, the government will use the windfall revenue gains to promise income tax cuts on top of the company tax cuts it is currently trying to get through parliament.

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When next for the Aussie dollar?

Wed, 21 Feb 2018

This article first appeared on the Yaho7 Finance web site at this link https://au.finance.yahoo.com/news/next-aussie-dollar-041651007.html 

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What next for the Aussie dollar?

It has been a turbulent few weeks for financial markets, including for the Aussie dollar. The AUD has been on a roller coaster, having reached a high of 81.2 US cents in late January and a low of 77.7 US cents about 10 days ago having traded at a low around 75 cents in December.

It is currently trading around 79.5 US cents, with the market divided about which direction will break over the next 12 months.

Foreign exchange markets are driven by many factors. For the Australian dollar, there are some powerful influences that have shown to determine its fortunes. One of those is the gap in interest rates between Australian and the rest of the world. When Australian interest rates are substantially above those of the rest of the world, there is often a bias from investors towards the AUD which drives it higher. When the interest rate gap compresses, the appeal of the AUD is reduced.

Which brings us to a fascinating situation at the moment, when we compare Australia and the US. With the US Federal Reserve embarking on a series of interest rate increases and the Reserve Bank of Australia squarely on hold, the interest rate gap between Australia and the US is effectively zero. This is not only for the official cash rate, but also for 10 year government bonds. This is a rare occurrence and prospective changes in the interest rate gap is one reason why the risks favour the AUD falling back towards 70 US cents over the next year or so.