Federal budget to dominate the economic agenda
The federal budget will trump local data this week as Jim Chalmers’ fifth fiscal plan holds the key to the Federal Reserve’s future interest rate calls.
The economy was already accelerating beyond its limit before conflict in the Middle East broke out in February, sending oil prices soaring, and the Central Bank is hoping its finance chief does not add fuel to the inflation fire on Tuesday.
Rising demand because supply is tight is the last thing Mayor Michele Bullock needs after three consecutive rate hikes.
Oxford Economics Australia’s Harry Murphy Cruise estimates the conflict in the Middle East will increase budget profitability for this financial year by around $11 billion through higher commodity prices, income tax and GST revenue.
This will give the government a “desperate” windfall to spend on household cost-of-living supports.
“But if they do that, Australia’s burgeoning inflation problem could become much worse,” Mr Murphy Cruise said.
“Firms are already struggling to keep costs under control. If they have to compete with governments for workers and capital, prices will rise even further.”
This makes policymaking extremely difficult, according to HSBC chief economist Paul Bloxham.
He said the Central Bank was willing to use its “blind instrument” to bring down demand, but “a surgical approach to the budget would be optimal.”
The government has yet to announce additional household supports beyond reducing the fuel excise tax, which is expected to cost more than $2.5 billion in revenue.
However, there is speculation that wage earners and salaried employees may receive a one-time “earned income offset” of $200 to $300.
Citi economists Josh Williamson and Faraz Syed estimate it would cost $3 billion to $4.4 billion when applied to all salaried workers.
“Assuming all this is spent, annual (headline inflation) will increase by at most 0.1 percent,” they said.
“The big picture of the expected change in the underlying cash position shows little reason for the RBA to panic.”
More importantly, the two will be how long the conflict in the Middle East and the shock to energy prices will last, what will happen to domestic inflation expectations and how quickly the recent interest rate increases will be reflected in the economy.
Extending the fuel excise tax cut, along with additional tax cuts or subsidies, could raise underlying inflation and create more headaches in the future.
Economists at the Commonwealth Bank and ANZ think the Reserve Bank’s walk cycle is over, but NAB and Westpac expect further increases.
Westpac chief economist Luci Ellis believes the central bank, which had previously opted for a fourth straight rise in June, will wait to see what happens in Iran before back-to-back rate hikes in August and September.
Ms Bullock acknowledged on Tuesday that the increases gave the Reserve Bank board “room” to see how the conflict plays out.
But Dr Ellis expects the second-round effects of higher fuel prices to be greater than the Reserve Bank forecasts imply; This could lead to a “wake-up call” in the June and September quarterly inflation data.
He said the federal budget and the Fair Work Commission’s annual pay review decision in June would be crucial.
Lending and wage growth data will also be released on Wednesday.
Meanwhile, investor interest in Wall Street has increased due to gains in AI stocks and stronger-than-expected employment numbers in the US.
S&P 500 closed Friday at 7,398.93 points with an increase of 0.84 percent. Nasdaq increased by 1.71 percent to 26,247.08 points, and the Dow Jones index increased by 0.02 percent to 49,609.16 points.
Australian stock futures fell 42 points, or 0.47 percent, to 13,148.
On Friday, nearly $43 billion was wiped off Australian indices as oil prices rose in anticipation of continued military intervention between the United States and Iran.
The S&P/ASX200 index decreased by 1.51 percent, decreasing by 133.7 points to 8,744.4 points, while the overall All Ordinaries decreased by 126.5 points (1.39 percent) to 8,980.5 points.
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