The Experts

Federal Budget 2014 dominates the agenda

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by Craig James

The Federal Budget usually comes and goes in a matter of days – from a media standpoint. This year, it seems more like a matter of months rather than days. But all the speculation about a ‘horror budget’ will either be confirmed or denied when the Treasurer hands down the report at 7.30pm AEST on Tuesday.

Why the report has to be handed down at that time of night remains one of the big imponderables, especially given that State budgets are handed down generally mid-afternoon and economic data is released at 11.30am AEST at the latest.

The thrust of the Budget document is largely known. The new Government believes that action needs to be taken now on health spending, pensions and family benefit payments in order to prevent the Budget being permanently left in the red and leading to a build-up of government debt.

At this stage there are few estimates of the budget position given uncertainties about how hard and quickly the Government will take the axe to spending.

At the Mid-Year review the budget deficit was estimated to be in deficit by $47 billion in 2013/14 and in deficit by $33.9 billion in 2014/15.

In the 12 months to February 2014, the budget was in deficit by $25.5 billion. So to achieve the 2013/14 forecast would require four months of deficits totalling a record $17 billion.

If the budget deficit does come in lower than forecast, a key reason will be stronger-than-forecast growth in nominal economic growth (real growth of the economy plus inflation). The government had forecast nominal GDP to grow 3.5 per cent this year and next but current annualised growth is 4.8 per cent.

Clearly one group that will be scrutinising the Budget details closely are Reserve Bank policymakers. If fiscal (budget) policy is tightened markedly, then the Reserve Bank may elect to put an easing bias back in place, that is, a leaning in favour of rate cuts.

How tough does the Budget need to be to be noticed by the Reserve Bank? The RBA Governor said in recent testimony: “to the extent that something in the budget affects the path of aggregate demand in the economy one way or another, assuming that that is of significant magnitude—if you are talking $1 billion, that is not noticeable in the forecast demand track, but if you are talking $8 billion or $10 billion then it is—that obviously has to be built into our outlook on which we base the interest rate decision.”

Other things to watch next week

On Monday the Reserve Bank will release credit and debit card lending figures. Consumers have tended to pay for purchases out of their own funds rather than put them on credit. Any change in consumer behaviour will have implications for interest rate settings. The NAB business survey is also out on Monday and investors will be watching to see what effect Budget speculation has had on business confidence.

On Tuesday, the Bureau of Statistics (ABS) issues March home loan data. The number of loans to owner-occupiers may have fallen by 2.7 per cent with the value of all lending down by 4.0 per cent.

On Thursday new car sales data is released for April together with detailed labour market figures. And on Friday, the ABS issues the broader lending finance figures.
US: inflation & retail sales to watch. China: the monthly data download

In the US on Monday the monthly Federal Budget report for April is issued while retail sales and import & export prices data is issued on Tuesday. Retail sales may have lifted 0.4 per cent in April.

On Wednesday the weekly data on housing finance is issued together with figures on business inflation (producer prices). Core producer prices (excludes food and energy) are tipped to have lifted 0.2% in April.

On Thursday the tempo cranks up a notch. Data on consumer prices, industrial production and capital flows are released together with the regular weekly data on claims for unemployment insurance. In terms of surveys, the influential Empire State and Philadelphia Federal Reserve surveys are also issued. Federal Reserve chief, Janet Yellen, also delivers a speech. Core consumer prices are tipped to have lifted 0.2 per cent in April with production up 0.2 per cent.

And rounding out the week, on Friday data on housing starts and consumer sentiment are issued. A solid 4 per cent lift in housing starts is expected in April.

Overall, investors will be watching for signs of a broadening of the US economic recovery such as higher production, retail sales and home starts as well as firmer prices.

In China, the key day is Tuesday. Figures on retail sales, industrial production and investment spending are all issued for April. The data can influence resource shares and the Aussie dollar.

Iron ore in focus

Commercial production of iron ore started in Australia in 1964. Now iron ore is Australia’s largest export. Data on iron ore prices can be traced back to 1966. Up until 2003/04, prices averaged US$15.25 a tonne with the maximum price at US$20.12. Prices doubled in the 2004/05 financial year and doubled again to US$107.09 in 2008/09.

The spot iron ore price stands at US$106 a tonne, down from an average of US$136 a tonne over the last five years. But the cost of production at BHP Billiton is reported around US$43 a tonne with Rio Tinto reported at US$38 a tonne.

Upcoming economic and financial market events

Australia

  • Monday 12 May - Credit & debit card lending (March); NAB business index (April)
  • Tuesday 13 May - Housing finance (March); Federal Budget
  • Wednesday 14 May
  • Thursday 15 May - Detailed labour market data (April); New car sales (April)
  • Friday 16 May - Lending finance (March)


International

  • Monday 12 May - US Federal Budget (April)
  • Tuesday 13 May - US Retail sales (April); China monthly data (April)
  • Wednesday 14 May - US Producer pricers (April)
  • Thursday 15 May - US consumer prices (April); US industrial production (April); Philadelphia Fed survey; Speech by Federal chair, Janet Yellen
  • Friday 16 May - US Housing starts (April); US Building Permits (April)

 

Published: Monday, May 12, 2014

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