April 1, 2019

Australian Markets Weekly: The Budget, RBA, Election ….

This weekly investigates the divergence between weak GDP growth and the strong labour market.

For the full picture, download the report: Australian Markets Weekly 1 April 2019


In this issue we cover:

  • The key interest in the RBA Board meeting will be whether the RBA follows the lead of the RBNZ and moves to a formal easing bias. We think this is unlikely at this stage given incoming labour market indicators (including in today’s NAB survey) continue to suggest a relatively robust labour market. While that’s the case, the international storm clouds continue to gather, and the challenge from weak consumer spending and the end of the residential construction boom still leave us comfortable with our view that the RBA will eventually decide to provide a little more support for the economy to ensure that further progress lowering unemployment is made.
  • On the RBA, this weekly investigates the divergence between weak GDP growth and the strong labour market, finding that GDP growth no longer provides a reliable lead on either employment or unemployment, partly because potential growth has declined over time. In contrast, job vacancies and the NAB business survey have retained their strong correlation with employment and unemployment. This suggests to us that the divergence between weak growth and a strong labour market could persist until vacancies and the survey deteriorate further.
  • Hot on the heels of the RBA Board meeting is the Federal Budget. NAB will provide detailed coverage of the Budget on the night. A number of important details of the Budget – and the Opposition’s policies and strategies in response – have already been announced. These suggest: (1) the Budget will not include very large tax cuts or spending policies, focusing on targeted measures so the Coalition can continue to claim it is a better economic manager than the Opposition; (2) the forecasts will still include budget surpluses from 2019-20 onwards; (3)personal income tax cuts scheduled for 2022-23 are reportedly to be brought forward to 1 July this year; (4) there will be targeted hand-outs before the Election to those on welfare to assist with high electricity prices; and (5) the Coalition will add to its infrastructure spending. Labor has signaled that it will match any Coalition promises, issuing a major economic statement in Q3 this year to review the budget outlook and policy promises.
  • The NAB Survey for March showed another welcome modest improvement in business conditions after the plunge between December and February. The increase was concentrated in NSW. The best business conditions are being experienced in NSW, Victoria and Tasmania and by the mining industry. That said, the survey suggests the economy is experiencing somewhat slower – but not significantly weaker – growth than expected three to six months ago.

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