Finance Finance News Plenty of stimulus for economy: Deloitte

Plenty of stimulus for economy: Deloitte

Deloitte predicts the budget will have a brief brush with surplus before moving back into a modest deficit.
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Tax cuts, record low interest rates and a pipeline of coal and iron ore exports to China are pointing to good news for Australia’s economy.

The Morrison government’s election win is also predicted to improve business and consumer confidence after both measures dropped due to uncertainty about the May 18 result.

In its latest business outlook released on Monday, leading forecaster Deloitte Access Economics said other factors helping the economy included lower bank funding costs and a modestly lower Australian dollar.

“The drought and the downturn in housing prices are hurting the Australian economy, but the global slowdown has – so far – been good news for Oz,” Deloitte partner Chris Richardson said.

“This is the first ever global slowdown in which the world has actually given Australia a pay rise instead of a pay cut.”

National income growth is right on its longer term average, he said.

But inflation and wage growth might “continue to disappoint”, as unemployment wasn’t able to lower enough to help the two.

Mr Richardson believes the Reserve Bank of Australia has changed its model of where the unemployment rate needs to be before wages start to grow.

He said it needed to drop from 5.2 per cent to somewhere below 4.5 per cent before “wages start to party”.

“But to get unemployment down to 4.5 per cent, it needs to create an extra 200,000 jobs – which is hard, and that’s why it is asking the federal government to help,” Mr Richardson said.

Deloitte, therefore, predicts the cash rate to soon lower to 0.75 per cent or 0.5 per cent, with Australia to follow the global trend of having very low rates for some time.

Mr Richardson also noted the RBA’s two recent interest rate cuts happened because the economy was not only slower, it was slower than it needed to be.

Weakness in wages is predicted to last longer than the demand for commodities from China, but the states are helping by keeping up infrastructure spending.

“There’s more stimulus already coming than people realise,” Mr Richardson said.

Deloitte predicts this combination will see the budget have a relatively brief brush with surplus before easing back into modest deficit.

Although it means Australia will benefit from long-term infrastructure, the spending doesn’t “leave much of a rainy day fund”.

“And the Reserve Bank is busily eating into its own rainy day fund,” the report said.

“Let’s hope it doesn’t rain – policymakers haven’t left much wriggle room if it does.”

Treasurer Josh Frydenberg on Sunday was upbeat about the economy and played down calls for more government stimulus.

But shadow treasurer Jim Chalmers said the government won’t admit there is a problem with the economy, which has reduced consumer confidence.

“The RBA has been forced to pick up the slack where it can, because the government has vacated the field when it comes to economic growth,” Mr Chalmers said.