Some good news for Australia from the Federal Budget and National Accounts
The Australian government released its budget for 2018/19 during the month and forecast a surplus of A$2.2 billion in 2019/20, returning to the black a year earlier than expected. If achieved, Australia’s fiscal position would be the envy of most other developed economies. The improvement in the budget position has not been the result of deep cuts to government spending, but rather a consequence of higher revenues from bracket creep as rising nominal incomes have pushed individuals into higher tax brackets. This is evidenced by the fact that personal tax revenues increased from 9.5% of GDP to 11.2% over the past seven years. To redress what is effectively a tax hike by stealth, the government has announced a plan to reduce personal taxes in three stages over a seven-year period to augment the reduction in corporate taxes already announced. If successfully implemented, this would be a fillip for our economy, which has struggled to rebalance following the end of the mining boom largely due to the lack of purchasing power by consumers burdened by stagnant growth in real wages and high levels of housing debt.
The March quarter National Accounts saw Australian GDP print at a surprising 1% to bring the annual rate to 3.1%, up from 2.4% from the previous quarter. Strong contributions from net exports added 0.5% to growth with household spending adding 0.3%. The outcome exceeded the market’s expectation as well as the government’s budget assumption and RBA forecasts. The inflation measures embedded in the National Accounts were also well behaved and as a consequence the RBA will be in no hurry to raise cash rates anytime soon.
The fundamentals supporting risk assets such as shares remain sound and in line with our forecasts. A synchronised global economic recovery is underway which is providing a solid platform for profit growth and the opportunity for central banks to gradually reduce the level of monetary accommodation by unwinding the emergency measures imposed following the GFC. Despite strong employment gains in most economies, wages growth remains subdued which is keeping inflation under control and moderating the pace of interest rates rises.
It has to be acknowledged however that the elevated level of market volatility we have witnessed is a consequence of rising risks such as the threat to the global economy from trade protectionism, possible EU fragmentation and geopolitical issues in North Korea and Iran. Investing is a blend of art and science that seeks a balance between risk and return. In times of rising uncertainty, the need to preserve capital assumes greater significance. As a consequence of this, we plan to use periods of market strength to gradually de-risk portfolios by incrementally reducing allocations to equity markets in favour of more defensive assets such as cash and shorted dated fixed interest.