CHALLENGES FACING JOSH FRYDENBERG'S BUDGET
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DEFICITS: The budget is expected to be in far better shape than predicted just a few months ago due to a much stronger than expected recovery from last year's recession and a speedy rebound in the labour market. After ratcheting up massive record deficits to pay for huge support measures during the pandemic, like the JobKeeper wage subsidy, some economists are talking about a potential surplus this decade. However, the treasurer is likely to resist being drawn on that after prematurely announcing the budget was back in the black in 2019.
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ECONOMY: Australia's recovery from its first recession since the early 1990s has been impressive, scoring two consecutive quarters of growth above three per cent for the first time in history in the second half of 2020. This followed a seven per cent slump in the June quarter. The economy is expected to have made a full recovery from the pandemic-fuelled downturn in the March 2021 quarter. Consumer spending is expected to be a major driver of growth due to record low interest rates, falling unemployment and rising house prices. In its recent economic outlook, the IMF forecast Australian growth of 4.5 per cent in 2021, which compares with a long-term trend of around 2.8 per cent. However, it warned the rebound both here and globally still depends on successful rollouts of coronavirus vaccines.
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LABOUR MARKET: The jobs recovery has smashed all expectations. The unemployment rate fell to 5.6 per cent in March when Treasury was expecting it to return to 7.5 per cent by that time of the year, a 22-year high seen briefly during the depths of the recession. However, the impact of the withdrawal of the JobKeeper wage subsidy at the end of March has yet to register in official figures. Treasury has predicted as many as 150,000 jobs could be lost as of this support measure being axed. Given the strength of the recovery, economists are becoming confident these job losses could be absorbed.
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WAGES GROWTH: The missing link in the economy's recovery so far has been a notable improvement in wages growth, although this was equally subdued pre-COVID-19. As of the December quarter the key wage price index was running at an annual rate of 1.4 per cent, just above a record low of 1.2 per cent seen in the previous quarter. The Reserve Bank wants to see wages growth above three per cent to bring some normality to inflation and interest rates.
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CONFIDENCE: Consumer confidence - a pointer to future household spending - has been particularly perky in recent months aside from temporary wobbles as a result of snap - but short - COVID-19 lockdowns. This has been reflected in generally solid retail spending figures. Business confidence is also back in its stride after overcoming the shock of last year's recession, which is crucial for future investment and hiring plans.
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INTEREST RATES: One saving grace for the government as its debt grows to over $1 trillion in the next couple of years is record low interest rates. The Reserve Bank expects to keep the cash rate at a record low 0.1 per cent until 2024. It wants to see the inflation rate sustainably within its two to three per cent target band before considering a rate hike. This would need a substantially lower unemployment rate and much higher wage growth.
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GLOBAL ECONOMY: While not all countries are enjoying a rapid recovery from recession like Australia, the world economy is back on a firmer footing. The IMF is predicting the global economy to grow by six per cent in 2021 and 4.4 per cent in 2022 after contracting by 3.3 per cent in 2020.
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COMMODITY PRICES: In December, Treasury had expected the iron ore price to drop to $US55 per tonne. Instead, one of Australia's major exports has soared, hitting a record $US190 per tonne and surpassing its 2011 high. Despite trade frictions with China, its demand for Australian iron ore remains strong, while Brazilian iron exports continue to struggle.
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CREDIT RATINGS: Australia remains one of the few countries to hold a triple-A credit rating from the world's three major rating agencies. While Australia's two largest states were downgraded as casualties of the pandemic, there was no impact on the sovereign. Even so, Standard & Poor's has Australia on a negative outlook, which could see a downgrade in the next two years if an expected narrowing in budget deficits fails to materialise.
Australian Associated Press
