Westpac preview of the Australian government’s Mid-Year Economic & Fiscal Outlook (MYEFO), which we learnt today will be released on Monday: Australian Treasurer Hockey: Says MYEFO to show deeper deficit

Westpac says:

  • The starting position for the underlying cash deficit is likely to be a deterioration in the order of $10bn for 2014/15 and $15bn in following years
  • That would have the 2014/15 budget deficit revised from $29.8bn to $40bn
  • And the deficit for 2015/16 revised from $17.1bn to $32bn
  • Net public debt increases to $324bn, 17.4% of GDP by June 2018, revised up by $60bn from $264bn, 14.0% of GDP from the May budget forecast
  • The weaker starting position for the budget reflects two factors: (1) weaker nominal GDP growth in 2014/15, centred on lower commodity prices; and (2) government savings measures being blocked by the Senate
  • Nominal GDP growth in 2014/15 will fall short of the 3% forecast in May, potentially being lowered to 1.0%
  • The drop in the terms of trade has proven to be sharper than expected and real GDP growth may be closer to 2.25% than the 2.50% previously expected
  • The terms of trade is likely to fall by around 13% in 2014/15, rather than the 6.75% expected in May. These numbers include an iron ore price of $60/t for June 2015 and for June 2016, rather than the budget assumption of around $95/t for June 2015 and $90/t for June 2016.
  • We expect the economic growth forecasts for the following years to be unchanged from those in May

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There is also more here from the Australian Financial Review: Joe Hockey flags further spending cuts

Its an ungated article from the Review.

Some interesting comments from Hockey in it … he has dialled back on trash-talking the economy:

  • Dismissed this week’s slump in business confidence, saying it varied from week to week
  • Added that the recent drop was linked to commentary on the September quarter accounts
  • He emphasised the economy would strengthen next year, with job ads strong and a new infrastructure programme picking up speed
  • “Next year we’re going to see cranes all over the county … and that’s a positive sign.
  • “You’re also going to see very strong housing construction.
  • “The fact is the Australian economy is fundamentally strong. “There’s no doubt in my mind that the Australian economy has a good trajectory. We’ll say that on Monday.”

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Fiscal tightening has been a concern in Australia as the economy sees declining investment (the end of the mining boom) and other sectors struggling to replace the lost jobs etc. If the government is signalling a willingness to tolerate higher deficits during the transition phase it should be a positive for the economy and then for the currency. Whether its enough to offset the bearish sentiment on the AUD, though …