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16 Dec 2014
Australian fiscal update: Bigger deficit – Nomura
FXStreet (Barcelona) - Charles St-Arnaud, Research Analyst at Nomura notes that today’s MYEFO shows Australia faces a larger deficit as tax revenues decline owing to weak wages and commodity prices, further expecting its impact on AUD to be neutral.
Key Quotes
“The Australian Treasury published its Mid-Year Economic and Fiscal Outlook (MYEFO) today. As expected, the Treasury revised its forecast for the deficit lower, expecting it to reach A$40.4bn in FY2014/15 from A$29.8bn previously.”
“The larger deficit is owing to a lower projection of fiscal revenues (A$6.2bn), but also the Australian Senate‟s decision to not approve certain measures contained in the Budget (A$3.4bn), mostly the delay in the decision to scrap the mining tax and related expenses. Nevertheless, the MYEFO shows that the budget should be balanced by FY2019/20.”
“The update is based on real GDP growth of 2.5% in FY2014/15 and 3.0% in FY2015/16, unchanged from the Budget. This is surprising and looks a bit optimistic as we currently expect growth of 2.6% in FY2015/16.”
“Most of the adjustment in the forecast was in nominal GDP, which is now expected to grow by 1.5% in FY2014/15 vs 3.0% previously and by 4.5% in FY2015/16 vs 3.75%.”
“The unemployment rate forecast was revised higher to 6.5% from 6.25% previously for both years.”
“Because of the relatively optimistic growth forecast, we believe there is a risk that the deficit may be bigger in the FY2015/16 Budget when released in May.”
“We believe the impact on the rates market will be limited, as demand for ACGBs should remain strong.”
“We think the impact of the MYEFO on AUD is more neutral. The impact will likely be felt if the Reserve Bank of Australia is pushed to cut rates next year, as the fiscal authority remains unwilling to provide support for economic rebalancing.”
Key Quotes
“The Australian Treasury published its Mid-Year Economic and Fiscal Outlook (MYEFO) today. As expected, the Treasury revised its forecast for the deficit lower, expecting it to reach A$40.4bn in FY2014/15 from A$29.8bn previously.”
“The larger deficit is owing to a lower projection of fiscal revenues (A$6.2bn), but also the Australian Senate‟s decision to not approve certain measures contained in the Budget (A$3.4bn), mostly the delay in the decision to scrap the mining tax and related expenses. Nevertheless, the MYEFO shows that the budget should be balanced by FY2019/20.”
“The update is based on real GDP growth of 2.5% in FY2014/15 and 3.0% in FY2015/16, unchanged from the Budget. This is surprising and looks a bit optimistic as we currently expect growth of 2.6% in FY2015/16.”
“Most of the adjustment in the forecast was in nominal GDP, which is now expected to grow by 1.5% in FY2014/15 vs 3.0% previously and by 4.5% in FY2015/16 vs 3.75%.”
“The unemployment rate forecast was revised higher to 6.5% from 6.25% previously for both years.”
“Because of the relatively optimistic growth forecast, we believe there is a risk that the deficit may be bigger in the FY2015/16 Budget when released in May.”
“We believe the impact on the rates market will be limited, as demand for ACGBs should remain strong.”
“We think the impact of the MYEFO on AUD is more neutral. The impact will likely be felt if the Reserve Bank of Australia is pushed to cut rates next year, as the fiscal authority remains unwilling to provide support for economic rebalancing.”