Next financial year, however, the budget deficit is forecast to blow out to $28.7 billion compared to the previous forecast of $26.1 billion. In spite of the four-year cumulative deficit widening from $84.6 billion in May to $94.9 billion now, the government is still predicting that the budget will return to surplus in 2020-21.
Government economic forecasts have been hampered by slow wage growth and weak inflation, which led to last quarter’s negative GDP reading. Forecasters have downgraded their expectations for economic growth in 2016-17 to 2.0%, down from the 2.5% forecast in the May budget.
Key to the government’s longer term forecasts for a return to budget surplus, however, is a strong recovery in economic growth from 2017-18 onwards. This forecast growth will come from a continued improvement in employment conditions, leading to wages growth and increased inflation.
The MYEFO contains the following key economic forecasts:
|Wage price index
Source: ABS and Treasury projections
The recent surge in the price of iron ore and coal have improved government receipts. While Treasury has forecast that mining profitability will improve this financial year, the positives have been outweighed by the weak wage growth and slower non-mining profits.
The inability to pass measures through the Senate has also been cited as a reason for the lack of budget repair, and has been an issue that the ratings agencies have raised as a concern. The subdued outlook from the government, and the downgrade to GDP growth forecasts, will be the focus of S&P and Moody’s as they assess whether to retain Australia’s AAA Credit Rating.
News in Review
- The US Federal Reserve raised its target policy rate range for the first time in 2016 from a range of 0.25% to 0.5% to 0.5% to 0.75%. The Fed also signalled three rate hikes in 2017, two or three in 2018 and three in 2019, while emphasizing in its post-meeting statements that the path higher will be "gradual."
- Sales at US retailers rose less than expected in November, interrupting a trend of solid spending by consumers over the previous two months.
- The Bank of England held its policy rate at 0.25% as expected and noted that the recent rally in the Pound, up some 6% since the start of November, would “point to less of an overshoot in inflation relative to the target in the medium term”.
- The Euro-zone’s ZEW economic sentiment index advanced more-than-expected to a level of 18.1 in December, indicating that investors remain optimistic about the region’s economic outlook.
- Despite the creation of nearly 10,000 jobs in October, Australia's unemployment rate remained steady at 5.6%, due to the workforce participation falling to a decade low. The fall was primarily the result of weak labour economic conditions in Australia’s mining states.
- The Westpac-Melbourne Institute survey measure of consumer sentiment dropped by 3.9% this month, with pessimists now out-numbering optimists. The fall is likely due to the most recent GDP number which showed the economy shrank by 0.5% in the September quarter.
- China’s economic activity indicators came in stronger than expected, with growth in industrial production unexpectedly rising to 6.2% year on year in November and growth in retail sales rebounded more than expected to 10.8% year on year in November.
- A consortium that includes multi-national private equity group KKR & Co. and global investment banking firm Macquarie Group Limited (MQG) has reportedly made an offer to buy local lottery operator Tatts Group (TTS) in a deal worth up to $5.37 billion.
- Crown Resorts (CWN) announced it will scale back its international ventures in favour of focusing on more opportunities in Australia.
- South32 (S32) has announced that coal production from its Illawarra operation would likely fall in the current financial year and its cost would be higher than expected, due to a suspension of mining caused by a build-up of methane. The company now expects to produce 7.9 million tons of coking coal in the 12 months to June 2017, 5.6% below last year’s production.
Christmas Closure Period
Please note that the Brisbane office of Pitcher Partners will be closed from the close of business Thursday 22 December 2016 and re-open on Tuesday 3 January 2017.
The ASX will close at 1.30pm Brisbane time on Friday 23 and Friday 30 December. It will re-open on Wednesday 28 December and Tuesday 3 January 2017 (28 & 29 December will be regular trading days).
All of us in the Pitcher Partners Wealth Management team wish you and your families a wonderful festive period and a happy, healthy and prosperous 2017.