The budget does not seem to have spooked equity analysts, but it has not excited them, either. Perhaps, as Delusional Economics suggests, it is about the best that can be done in the circumstances — that is, not much. Balance the books, hope China continues to do well, nibble at the marging on skills shortage and learn to live with a two speed economy. If you can’t lead, at least you can have the grace to do very little.
That is the conclusion of Macquarie:
The primary aim of this budget was to deliver a small headline surplus in FY12/13 of $3.5bn. Highly optimistic growth rates for the economy of 4% and 3.75%, respectively have been used to drive a strong budget “top line” outcome that will cover ongoing growth albeit modest, growth in spending. Any short fall in the GDPg forecasts will deliver ongoing deficits.
For the Australian sharemarket, the budget may indeed exacerbate existing pressures. The already weak domestic consumer related stocks/sectors are likely to see further pressures on spending suggesting little prospect of any a substantial recovery in retail spending and hence profits.
With unemployment forecast to fall to 4.5% across the next two years, skilled labour shortages appear likely to remain thus adding risks to wages. For resources, projects cost risks remain as do the risks of delays.
Goldman Sachs comes to much the same point, saying that this a budget that is “being sold as ensuring that all the benefits of the mining boom will be shared”. GS asks if enough has been done on labour propductivity and labour reform. Lower wages as the route to wealthier Australians, perhaps?
Merrill Lynch concludes that Treasury is passing the buck to the RBA:
China continues to have an overwhelming influence on the Budget. Improving commodity receipts have allowed the Government to avoid making politically painful fiscal decisions. The Budget could provide a boost in consumer sentiment since public opinion had been massaged to expect something much worse.
Measures to increase workforce participation and immigration were inline with our earlier work. However, they will not be enough to alleviate risks to the budgets and timelines of resource projects or to ease the RBA’s concerns about the tightness in the labour market.
Overall the Budget is unlikely to have much of an impact on the market as measures were pre-announced.
Economics: smoke & mirrors
The steeper return to surplus is largely achieved by upgrades to GDP and terms of trade assumptions and a higher ‘efficiency dividend’ from departments rather than specific savings. For the Reserve Bank, a tougher budget may have been a factor in delaying the next rate hike which we still expect in August.
Nothing has been done, in short, to address the imbalances in the Australian economy, which means that they will contnue to have a disproportionate effect on the equity markets. Companies exposed to indebted households will struggle, the banks are vulnerable as property weakens. Mining will probably do alright if China holds up. Energy seems the most sure bet. Business as usual.