Australian Markets Weekly

After seven years of negotiation Australia and Japan signed an Economic Partnership Agreement last week. Some call it a free-trade agreement but as one of my colleagues noted no trade is entirely free.

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Canberra

I was in Canberra last week.  More importantly, so were Japanese Prime Minister Abe and the new Senate.

The good news was that after seven years of negotiation Australia and Japan signed an Economic Partnership Agreement last week.  Some call it a free-trade agreement but as one of my colleagues noted no trade is entirely free.  For example, and unsurprisingly, rice was not part of the agreement.  More favourably, there will be better access and lower tariffs for some agricultural goods and consumers will benefit with duties on cars and electronics being removed.

Freer trade is important for a trading nation like Australia, where exports and goods and services account for a bit over 20% of GDP.   So this is good news and will boost the incomes/revenues for some exporters and should further foster the already substantial cross-border investment flows.

The Japanese deal, however, is unlikely to change the pecking order of Australia’s trading partners.  Big ticket exports of iron ore, coal, and LNG are already free of all duty into Japan and iron is free of duty into China.  Second, the Japanese agreement comes after a similar agreement was signed with South Korea earlier in the year meanwhile there is hope that after nine years of negotiation a freer trade agreement will be signed with China later this year.  Negotiations continue with India and Indonesia.

While this agreement won’t change the rankings, China #1, Japan #2, and South Korea #3, Japan will lift its share materially in coming years as its purchases of LNG step up from Australia’s new projects.  So while China will continue to be super-important, Japan will reassert its economic importance.

Remember too that while China’s importance to trade is undoubted, Australia’s services and cultural links continue to rise.   The chart below shows that a year ago China overtook the UK to become the second largest source of short term visitor arrivals to Australia and could overtake NZ within coming years.

The Senate, carbon, and budget consolidation

The less positive news out of Canberra was the Government’s first engagement with the new Senate – the Government likely needs the support of six of the eight cross-benchers to get key pieces of legislation through.

The first test was the intended removal of the carbon tax, where despite extensive negotiations the bill failed to get through the upper house.   Newspapers indicate that almost certainly the legislation will be passed this week but we’ve been asked by folk whether there are any market implications from Senate developments.

Our conclusion is that market implications are negligible.

For one, policymaking in Australia still looks a breeze compared to say the USA.  Second, medium term fiscal consolidation is still likely to occur – the major savings in the Government’s Budget occur in the out years.  Moody’s Steven Hess was quoted in The Australian last week saying “The Australian Government has among the lowest levels of debt in relation to GDP of any advanced economy and we do not consider that there is a risk to the AAA rating of the government resulting from a delay and/or alteration in the budget.”

What is truer is that a difficult Senate will test the reform agenda of the Government.

Carbon tax and the CPI

Should the carbon tax be removed this week we expect it will subtract around 0.6 to 0.7% from the overall CPI, mostly for utilities and mostly in Q3.  The legislation currently before parliament says repeal will take effect from 1 July 2014.

Week ahead – Yellen and China

A quieter week in Australia as we get the Minutes from the RBA’s July meeting tomorrow and on Thursday the comprehensive NAB Quarterly Business Survey for Q2.  Offshore the highlight will be China GDP and Fed Chair Janet Yellen’s testimony to Congress.  The Fed debate is not whether they will lift the funds rates but 1) when and 2) by how much.  Not sure we’ll be any wiser on these points by the end of the week.