For the full picture, download the report: Australian Markets Weekly 16 December 2019

MYEFO – a downgraded economic outlook is problematic for the government’s surplus goals

• The Mid-Year Economic and Fiscal Outlook (MYEFO) released today reveals downgrades to the economic outlook. Growth is slower in the near term and the government has reduced its expectation for wages growth. This has forced the government to lower its expected budget surpluses, where it now forecasts only small surpluses (ranging from 0.2 to 0.4% of GDP) in the next four years.
• Given the average forecast error for the MYEFO forecast of the current financial-year budget outcome is 0.6% of GDP, the lowered surplus outlook suggests there is a risk that the government does not deliver a surplus in 2019-20. The government did not announce any material fiscal stimulus, with additional spending – on drought, aged care and a slight bring-forward of infrastructure projects – only totalling $1.2b in 2019-20 and $1.1b in 2020-21. This suggests the RBA will have to continue to carry the burden of supporting growth.

NAB’s 2020 outlook –  a little weaker than both the Government and RBA forecasts

• NAB’s forecasts for the economy see GDP growth at a moderately below trend 2.0% in 2020 and 2.4% in 2021. These rates of growth are not sufficient to prevent the unemployment rate rising somewhat, with unemployment expected at 5.5% in 2021.
• While the global outlook has improved, the RBA will likely need to provide further support to the economy, especially given the government has not provided material additional fiscal stimulus. NAB forecasts the RBA to cut the cash rate twice by 25bp in February and June 2020, bringing the cash rate to 0.25%. We see risk of quantitative easing in H2 2020, should the economy turn out weaker than we forecast.

The month ahead –  AU RBA minutes, labour data, retail sales; NZ GDP

• AU:  The RBA minutes might repeat that “a case could be made to ease” policy, though the Board remained in assessment mode until February. There could also be more about unconventional policy given Governor Lowe’s recent speech on the topic. Thursday’s November labour market survey should see an unchanged unemployment rate and a 17k increase in employment after last month’s shock fall. November retail sales released on 10 January is the highlight in the following weeks, where NAB forecasts a solid rise of 0.6% m/m (we have revised up since Friday).
• Global: For Thursday’s NZ Q3 GDP BNZ anticipate a 0.5% q/q expansion, compared with the RBNZ’s 0.3% forecast. Elsewhere attention remains focused on US impeachment proceedings, Chinese PMIs and Brexit developments following the UK election.

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