What does it all mean?

• There was never going to be any surprises in Federal Treasury’s assessment of the economy. The Federal Government made sure of this by releasing the Economic Statement a few days before calling the election. It wouldn’t have been a good look if an election was called and then Treasury revealed a blow-out in the Budget and projections of slower economic growth and higher unemployment. Better the Government release the bad news rather than be accused of failing to reveal the true state of the nation’s finances.
• To recap, Federal Treasury is tipping slower growth this year and higher unemployment and a budget deficit of $30.1 billion this year rather than $18.0 billion.
• Interestingly not all the figures in the PEFO document were the same as the August Economic Statement. The PEFO projects a fiscal balance deficit of $22.1 billion in 2014/15 and the Economic Statement shows a deficit of $22.2 billion. Curious, but essentially splitting hairs.
• Overall the budget deficit and debt levels are low on a global scale but arguably should be even lower for an economy benefitting from a China mining boom.
• The latest business survey suggests that little has changed over the past month. And while it was obvious that there would be no ‘new news’ in the PEFO, it would also have been generally expected that there would be few changes in the business survey. The $64 question is how businesses are feeling now that there are new Budget numbers, an Election has been called and interest rates have been cut.
• The bottom line is that Aussie businesses will only start to cheer up when the election is out of the road.
• The PEFO highlights the challenges that lie ahead for the next Government. Any responsible Government would announce a fundamental review of tax measures after the election including the GST and state government reliance on stamp duty and land tax.
• Scare campaigns being run by both sides of politics concerning the nation’s finances need to end as they are contributing to depressed business and consumer confidence.

What do the figures show?

Pre-Election Economic & Fiscal Outlook (PEFO):

• The budget deficit for 2012/13 is still estimated at $19.4 billion or 1.3 per cent of GDP. But compared with the May Budget, the 2013/14 budget deficit is now tipped at $30.1 billion (1.9 per cent of GDP), up from the earlier estimate of $18.0 billion (1.1 per cent of GDP).
• Looking further out: the 2014/15 budget deficit is forecast at $23.97 billion (1.5 per cent of GDP); the 2015/16 budget deficit $4.71 billion (0.3 per cent of GDP); 2016/17 budget surplus $4.03 billion (0.2 per cent of GDP).
• Federal Treasury now tips 2.5 per cent economic growth in current year, down from the May budget forecast of 2.75 per cent.
• The jobless rate now seen to average 6.25 per cent this year, up from the previous forecast of 5.75 per cent.
• Nominal GDP expected to grow by 3.75 per cent, down from the previous forecast of 5.0 per cent.
• Consumer price index to average 2.5 per cent this year, up from the previous forecast of 2.25 per cent.
• Net debt is expected to peak as a proportion of GDP in 2014/15 at 13 per cent ($212.1 billion) and fall to 12.7 per cent in 2015/16 ($219 billion).

National Australia Bank Business Survey:

• The NAB business confidence index weakened from minus 0.4 points to minus 2.8 points in July. The business conditions index improved from minus 7.5 points to minus 6.6 points.
• The index of trading conditions improved from minus 6.5 points to minus 4.4 points; employment improved from minus 6.1 points to minus 4.9 points; profitability deteriorated from minus 8.7 points to minus 11.4 points; and forward orders deteriorated from minus 5.4 points to minus 6.1 points – the 20^th straight month that forward orders have contracted.
• In terms of business conditions, NAB noted: “While solid improvements in business conditions were reported in retail, mining and recreation & personal services, these gains were largely offset by weaker conditions in finance/ business/ property, construction and transport & utilities. The still weak set of industry conditions suggests the lower Australian dollar is providing little support to activity domestically – especially in the trade dependent manufacturing industry, which experienced the weakest conditions since March. Forward looking indicators of activity suggest little near-term revival in business conditions, with forward orders, employment conditions, stocks and capacity utilisation all remaining well below long-run average levels.”
• Inflationary pressures increased in July. The monthly reading of labour costs rose at a 1.3 per cent quarterly rate in July after a 0.7 per cent rise in June. Prices fell by 0.1 per cent after a 0.2 per cent fall in June. Retail prices rose by 0.2 per cent in July after rising at a 0.3 per cent quarterly rate in June. And purchase costs rose at a 1.2 per cent quarterly rate in July, up from 0.4 per cent in June.
• Capacity utilisation lifted from 79.3 per cent in June to 79.9 per cent in July, but still below the long-term average of 81.2 per cent.
• The proportion of firms reporting that they did not require credit stood around 66 per cent in July.
  • The Pre-Election Economic & Fiscal Outlook document is released by Federal Treasury after an election is called. It contains the latest economic assumptions and Budget projections.
  • The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.
• The PEFO document and latest business survey have no major implications for financial markets. The economy is locked in a holding pattern until the election is held.
• The PEFO highlights the fact that all sources of government revenue should be up for review after the election. No matter what party takes Government, there is a revenue problem to be addressed. And no option should be ruled out. Any responsible Government needs to assess all taxation measures and that includes the GST.

Why is the data important?

• The Pre-Election Economic & Fiscal Outlook document is released by Federal Treasury after an election is called. It contains the latest economic assumptions and Budget projections.
• The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.

What are the implications?

• The PEFO document and latest business survey have no major implications for financial markets. The economy is locked in a holding pattern until the election is held.
• The PEFO highlights the fact that all sources of government revenue should be up for review after the election. No matter what party takes Government, there is a revenue problem to be addressed. And no option should be ruled out. Any responsible Government needs to assess all taxation measures and that includes the GST.