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Wayne's world

What’s the most important question you have to know the answer to from this year’s Budget? It’s simple and it is a two-part question.
It goes like this: what are the key economic forecasts or assumptions this Budget is based on and, importantly, can you believe them?
Three negatives
If you can, then Wayne’s Treasury World is excellent! If you can’t, then as an investor, saver, consumer, employee, employer or business owner, you have to ask what will really happen and are you well placed to deal with the future?
This Budget, which has been pretty well received, comes with three big negatives clawing at confidence about our economic future. They are the credit crunch and the fall in the stock market, which seems to be getting better in recent weeks. However, lots of Aussies are under water with their shares and feel decidedly poorer from the experience.
The rise and rise of interest rates
The second challenge has been the 12 successive interest rate rises and the extra rises thrown in by the banks because of the credit crunch. This has created the makings of a local slowdown already, which could end up being worse than expected.
And oil prices …
Finally, we have rising oil prices, aided and abetted by higher food prices, which is driving up cost-push inflation and demand-pull inflation is being KO’d by the Reserve Bank’s interest rate assault. There are claims out there that oil prices could go to $US200 a barrel.
Take a look at our world
These are three big, bad and dangerous threats to the Aussie economy and it puts pressure on the appropriateness of the Budget.
To get a handle on how stressed out we are at the moment, have a look at the recent swag of depressing economic readings:
  • Housing finance and the purchase of new homes slumped in March – the biggest drop in four years
  • Australian business conditions fell in the latest month to the lowest levels in six years
  • Business profitability index at lowest reading for nearly five years
  • Business confidence at six-year lows
  • The Roy Morgan Consumer Confidence Rating at its lowest reading in 14-years
  • The Reserve Bank noted that there had been a “significant” slowing in domestic spending
  • The 23% slide in consumer confidence in the past six months is the biggest decline for an equivalent period in 18 years – that is, just prior to the last recession
  • The Performance of Services index, which measures the health of the services sector, fell by 7.6 points to a record, five-year low of 47.3 in April. A reading under 50 indicates a contraction of the services sector
  • The annual retail sales growth rate slowed to a two-year low. Western Australian retailers haven’t seen it as weak for 17 years
  • Dwelling approvals slumped again in March and in trend terms recorded the biggest decline in three and a half years
  • Only 131 council approvals applied to build new public housing in March, and this is the lowest result in records going back nearly 30 years
  • Investor housing loans at weakest growth rate since records have been maintained over 17 years ago
  • Personal credit is at a 19-month low
  • New home sales are at the lowest level in nine months
  • Credit card debt is growing at the slowest pace on record.
And now to Wayne’s world…
Now look at what the Treasurer says is in store for us for the next financial year – 1 July 2008 to 30 June 2009.
  • The Budget surplus has gone from $16.8bn to $21.7bn which is reasonably responsible
  • Economic growth, which drives jobs and demand is expected to fall from 3.5% to 2.75%
  • At the same time unemployment is tipped to rise from 4.25% to 4.5%, which is quite moderate and could be understated
  • The all-important inflation guess is a fall from 4% to 3.5%, which is consistent with claims that the cash rate of interest should fall over 2009. This is vital if we are to see home loan interest rates fall.
The tough reality
There were some business nasties in the Budget but they will not hurt business big time, while the tax cuts will give life to the economy as we are in a slowdown mode.
Before the Budget, the RBA said they thought the non-farm economic growth number would be 1.75% after being 4% for the year to December. This is a substantial slowdown for businesses not in the farming sector and the numbers would be helped by the buoyant mining sector. It says to me that non-farm and non-mining businesses are really doing it tough.
It says that interest rates should fall in 2009, which will be good for home loan borrowers and businesses. I don’t think this Budget will foil this likely scenario.
In one word …

I was asked by someone at a post-Budget lunch to describe Wayne Swan’s Budget in one word. It was not “great” or “astute” or “courageous”. It was appropriate and that’s a fair call given my concern about the slowdown. 

Published on: Thursday, May 15, 2008

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