Chief Economist and Head of Investment Strategy
This year’s budget faced two challenges. The first was to serve as the Government’s key economic statement ahead of a likely July 2 election; the second was to provide more confidence that the budget is on track to a surplus, keeping ratings agencies onside following recent impatience on their behalf.
This month, Shane Oliver provides key take-outs from the budget announcement and discusses the economic implications. He also provides an update on the rising Australian dollar and global sharemarket performance.
2016/17 federal budget
The Government has arguably made its intended pre-election statement, via modest individual and small business tax cuts funded in part by a wind back in superannuation concessions for higher income earners. However, it’s not clear whether we’re any closer to a budget surplus. Superannuation reform is in fact a key aspect of this budget.
- While the iron ore price has improved, the budget deficit is now projected to be $39.9bn in 2016-17 (up from $35bn in last year’s budget). Return to surplus is still not expected until 2020-21 and even then it looks tenuous.
- Modest personal and corporate income tax cuts are largely offset by superannuation reforms and higher tobacco excise. There is insignificant fiscal stimulus.
- The budget may provide a small boost to confidence, but it will be dominated by the latest Reserve Bank of Australia rate cut and the upcoming election.
- Expect minimal impact on the sharemarket, but maybe a small boost to discretionary retail shares.
Will the Australian dollar rise further?
The rise in the Australian dollar from below $US0.69 early this year can be attributed to two key drivers: improved investor sentiment – which has also triggered a rise in sharemarkets and commodity prices – as well as the US Federal Reserve’s (Fed) delay in raising interest rates. When an interest rate hike is delayed in the US, parking money there becomes less attractive at the margin compared to Australia, and this in turn results in a rising Australian dollar. But with the Fed likely to hike eventually and the RBA still in the process of cutting rates, the trend in the Australian dollar should remain down.
Australian and global sharemarket outlook
The improved sharemarket performance globally suggests the fears around global growth from earlier this year have faded. Several factors are driving this, including increased confidence regarding the economy in China and volatility in the U.S., which is set to remain an ongoing feature. However, the global economy will continue to grow, monetary policy globally will remain relatively easy and that will in turn underpin continued gains in sharemarkets on a trend basis.
Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.