With all the focus on debt and deficits run up by countries across the globe, it is pleasing that Australia’s name hasn’t been brought up. In fact, if Australia has been mentioned in despatches, it has merely been to contrast the strength of our position compared with the weakness of others.
Of course, it hasn’t always been the case. In the mid-1990s, Australia had net debt of almost $100 billion, around 18% of GDP. That large debt load was a legacy of ongoing budget deficits. In fact deficits stood at around 4% of GDP in both 1993 and 1994 financial years.
But a combination of solid economic growth and budget discipline led to budget surpluses appearing in the late-1990s with debt eliminated by 2006. In fact, the key challenge in the latter part of the noughties was working out what to do with the surpluses.
Australia went into the US financial crisis in good shape, and it is clear that we are emerging from the crisis just as strong. According to the OECD, Australia’s general government gross debt is the lowest of any OECD nation, standing at 15.9% of GDP in 2009. Luxembourg is next at just over 18%. But from there it is a fair jump to levels near 80% of GDP for the US and the Euro area and then to 189% of GDP in Japan.
According to the forecasters polled by The Economist, Australia is expected to post a budget deficit of 3.8% of GDP this year, well below the 6.3% in the Euro area, 9.9% of GDP in the US and 14.2% of GDP in the UK.
But because Australia has remarkably avoided recession and is quickly returning to ‘normal’ growth, the budget forecasts may prove pessimistic. In any event it does appear that the projected deficits for the next few years will most likely be revised lower.
The key question now is how quickly should the deficit be reduced. Quite rightly the Government is in no rush. Just like the Reserve Bank with its rate settings, the Government has time on its hands. And no doubt both the Government and Reserve Bank currently have reservations about the outlook for the global economy.
If the Government sticks to its forecast of spending growth of less than 2% a year (say 1.5%) and revenue grows in line with the nominal growth of the economy (say 5.5%) then the budget will be back in surplus in four years. If that ends up being the path of adjustment then the Reserve Bank will continue to modestly lift rates towards 4.50-4.75% over 2010. It would take a more aggressive budget forecast of flat to 1% growth in outlays for the Reserve Bank to markedly curtail its rate hiking plans.
The week ahead
The Reserve Bank generally features somewhere on the weekly financial calendar. But in the coming week the central bank doesn’t just feature – it dominates proceedings. In fact the only economic data to watch for are lending finance on Monday, another NAB business survey on Tuesday, imports on Thursday and Commonwealth Bank’s Business Sales Indicator on Friday.
The first of the Reserve Bank events occurs on Tuesday with minutes of the February Board meeting to be released. While these minutes generally attract a lot of attention, this month interest is particularly heightened given that the Bank was widely expected to lift rates and it didn’t budge. The Reserve Bank will no doubt stress that its inaction was prompted by the fact that its inflation forecasts were met and that removal of government stimulus created uncertainty about the outlook for the economy.
Also on Tuesday, Guy Debelle, the RBA’s assistant governor covering financial markets delivers a speech. And on Thursday Philip Lowe, the Bank’s assistant governor (economic) gets his chance to front the podium.
While investors will scan these speeches for hints on the next move in interest rates, most will be waiting for the Reserve Bank Governor’s testimony on Friday. Glenn Stevens faces a grilling by Federal Parliamentarians twice a year. This gives politicians a chance to do some grandstanding and point scoring (which they do) as well as an opportunity for the Governor to explain what’s going on in simple terms (which he generally does).
While the economic data will attract less attention, it’s still worth a look. The lending figures should confirm that Aussie consumers are again starting to borrow, albeit cautiously. And the January imports data is one of the timeliest readings on spending in the economy.
In the US, there is a spattering of key economic indicators to be released over the week. On Tuesday capital flows data is issued. On Wednesday figures on housing starts are released together with industrial production and minutes of the last Federal Reserve meeting. On Thursday new data on producer prices is released together with leading indicators and the influential Philadelphia Fed index. And on Friday data on consumer prices is issued.
Inflation certainly isn’t a problem at present and that should be confirmed with the latest figures. The core measure of producer prices (excludes food and energy) has risen just 0.1% in the past five months. And the same measure should have lifted just 0.1% in January. Similarly core consumer prices should continue recent trends, also lifting 0.1% in the month.
Of the activity indicators, economists generally expect firmer housing starts near a 580,000 annual rate. And analysts remain positive on industrial production. Production has lifted for six straight months and the winning streak should extend to seven months judging by latest figures for the ISM index and employment. Economists tip a 0.6% gain. And the leading index also is expected to record a solid lift of 0.6%.
Sharemarket
So far Australia’s profit-reporting season is going to script. Companies are reporting earnings well above what many would have only dreamed about six to nine months ago. Dividends are gradually being restored towards pre-GFC levels. And outlook statements are very much in the cautiously optimistic camp.
The profit-reporting calendar is always provisional – companies have the option to change their minds. Among those tipped to report on Monday are Bendigo and Adelaide Bank, Bluescope Steel and Austereo. On Tuesday earnings results are expected from Foster’s, OneSteel, Mirvac and Primary Health Care. On Wednesday, AXA Asia Pacific, Ansell, Brambles, CSL, Coca Cola Amatil and Transurban are slated to issue results. A big day of earnings results is scheduled for Thursday including AMP, Qantas, Santos and Wesfarmers.
Interest rates, currencies & commodities
Central bankers across the globe are constantly sharing information. It doesn’t happen publicly and the central bankers don’t provide details of the meetings, but it is important that action and rhetoric is consistent across developed nations. The communication was clear in 2008 and 2009 when all central banks dramatically cut interest rates over a short time period. Speed and aggression were of the essence. And central bank communication was clear at the end of January when all central banks withdrew swap lines with the US Federal Reserve.
The message in the current environment is that central banks may spring surprises. We have already seen a surprise from the Reserve Bank. And the Wall Street Journal has again emphasised the fact by noting: “officials are warning investors and banks to prepare for surprises.” Central banks don’t want people to get complacent, especially in expecting rate hikes to occur to a specific timetable. And given that interest rates are near zero in some countries, some central banks may need to try other techniques to wean economies off super-cheap liquidity.
Newspapers and other media may be used to soften up markets and prepare for change. The Wall Street Journal has suggested that the Federal Reserve may start the tightening phase by lifting the interest rate banks are paid on excess reserves held at the central bank. That measure may serve to wind back liquidity quickly and seamlessly in the early days of the tightening process without having to touch the federal funds rate.
Craig James is chief economist at CommSec.
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