Morrison has donned rose tinted glasses

Wed, 10 May 2017  |  

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/1164162-223853338.html 

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Morrison has donned rose tinted glasses

As per the normal process, the 2017-18 budget documents went to the printer over the weekend, some 48 hours prior to Treasurer Scott Morrison delivering the budget to the Parliament.

In that time, flood of economic news has cast a shadow over the economic forecasts which are for an acceleration in economic growth over the next few years, a gradual fall in the unemployment rate and a quite staggering acceleration in wages growth.

“Optimistic” might be the catch cry of those budget forecasts.

Morrison is hoping that the economy will miraculously pick up, leading to a surge in tax revenue which feeds into the estimate of a return to budget surplus in 2020-21. Suffice to say, any shortfall in what would be a strong performance in the economy will lead to yet another blow out in the deficit and the return to surplus will be pushed back yet another year or two.

It is usually unwise to quibble with Treasury budget forecasts, but the forecasts underpinning the budget numbers are very rosy. Few, if any, independent forecasters have such a positive outlook for the economy. They are suggesting growth will be softer than assumed by Treasury and this is for good reason.

In terms of the immediate outlook, the economic news in the last two days has confirmed:

-   Two consecutive months where retail sales have fallen. Retail sales account for approximately 20 per cent of GDP so this is not good news.

-   A sharp fall in residential building approvals which are now down 20 per cent over the past year. There seems little doubt that dwelling construction will fall away during 2018 and 2019.

-   Evidence that Sydney house prices have fallen around 1.3 per cent over the past month, signalling, just perhaps, that the housing boom is not only ending, but is heading for something more sinister.

-   The iron ore price has fallen to around US$60 a tonne (approximately US$55 FOB) which is the level Treasury has used when framing its tax revenue estimates. The budget papers reveal that every US$1 move in the iron ore price would impact the budget bottom line by $420 million in 2018-19 terms. In other words, if iron ore prices drop to the current consensus levels, around US$15 below the current price, the budget deficit will blow out by $25 billion over 4 years.

There is also an important forecast in the budget that the unemployment rate edges down from the current 5.9 per cent to 5.25 per cent in June 2020 and that wages growth will accelerate from the current record low 1.9 per cent to a pre-boom pace of 3.75 per cent in June 2021.

At the moment, there are more than 750,000 people unemployed, and a further 1.1 million underemployed. These numbers are rising and there is nothing in the run of recent news to suggest and reversal in the near term. As such, the ability of workers to get a pay rise is limited, and the budget estimates for a surge in wages growth is built on foundations of sand. Any shortfall in wages growth will mean lower income tax collections, weaker spending and lower GST receipts.

While economic policies are the centre piece of most budgets, the performance of the economy is vital for delivering revenue to the budget bottom line.

This budget is framed on a range of upbeat economic forecasts and if there is even a marginal shortfall in the economy relative to those forecasts, the budget deficit and level of government debt will yet again be revised higher.

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The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

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What's ahead for the Australian economy and markets in 2020

Thu, 02 Jan 2020

What's ahead for the Australian economy and markets in 2020

Happy New Year!

2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.

It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community. 

2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.

The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.

In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.

GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.