Cliff Notes: assessing the policy stance
Key insights from the week that was.
Regarding Federal Budget 2025, our bulletin and conversation with Chief Economist Luci Ellis provides a detailed view of the Government’s expected fiscal position and economic plan for the coming four years, if re-elected. Cost-of-living relief is a priority with 2024/25’s energy rebates extended to end-2025 and a ‘top-up’ tax cut planned for 2026 and 2027 alongside spending on essential services and critical infrastructure. There was also some support for SMEs and the construction sector. The bottom line for the Government’s finances from these policies and the underlying economic environment is an increase in the deficit from 1.0% of GDP in 2024/25 to 1.5% of GDP in 2025/26 after which the deficit is expected to gradually easing back to 1.1% of GDP in 2028/29. Relative to international peers, Australia’s federal debt remains comparatively low.
As discussed by Chief Economist Luci Ellis, recently announced budget measures are unlikely to materially shift the outlook for the RBA. Other data released since the RBA’s February meeting also has not provided a meaningful deviation from the recent trend. Of note this week, the Monthly CPI Indicator printed broadly as expected, the monthly trimmed mean measure ticking down from 2.8%yr to 2.7%yr in February. Last week’s labour market data was also indicative of balance between demand and supply, and the international environment is likely to be of little consequence for Australian inflation over the forecast period. Hence, we continue to expect the RBA to remain on hold next week but to cut three more times this year to 3.35% as inflation tracks back to and remains at the mid-point of the RBA’s 2-3%yr medium-term range.
Offshore, this week saw more rumours and news regarding US trade policy. New tariffs were announced on cars "not made in the United States" effective 2 April, dubbed Liberation Day by the Administration. In addition, US President Donald Trump also announced 'secondary tariffs' on countries buying oil and gas from Venezuela, also to take effect on 2 April. The rapid escalation of US protectionism has seen manufacturing sentiment retreat of late – the Richmond Fed Index for March dipped to -4pts, with new orders and employment both weaker. The drop in the Richmond Fed survey was broadly consistent with the latest readings from the Dallas and Philadelphia Fed regions, which also signalled a loss of momentum and confidence across US industry.
More broadly, core durable goods orders disappointed at -0.3% in February, continuing business investment’s poor run over the past decade, equipment investment having averaged growth of just 1.9%yr and structures only 1%yr. Of more concern for the market this week was Conference Board consumer confidence, the headline index falling to its lowest level since early 2021, and expectations at a twelve year low. Views on the labour market are more mixed amongst US households, the Conference Board employment measure remaining relatively robust after respondents to the University of Michigan’s survey showed more concern. It’s worth noting that businesses continue to pull forward imports to the US to get ahead of the imposition of tariffs. This trend has even affected Australia’s trade with the US despite our distance. US monetary policy makers’ concern over the potential inflationary consequences of tariffs also looks to be growing, St Louis Fed President Musalem this week warning that the "risks that inflation will stall above 2% or move higher in the near term appear to have increased" and that "indirect, second-round effects on non-imported goods and services could have a more persistent impact on underlying inflation".
Across the Atlantic meanwhile, the UK CPI was a touch weaker than expected in February at 0.4% (consensus 0.5%), leaving annual inflation at 2.8%yr compared to 3.0%yr in January. Core inflation edged down from 3.7%yr to 3.5%yr, but services inflation held up at 5.0%yr. While services continued to dominate the headline pulse, the share of components rising beyond the BoE's 2.0% inflation target narrowed to 54.6%. This print came ahead of the Spring Budget which saw expectations for growth cut from 2.0% in 2025 to 1.0%. Markets were keenly awaiting this release as the Autumn Budget showed that, to ensure the government is able deliver a balanced budget by 2029-30, costs can only rise by GBP9.9bn. This limited fiscal headroom has since been put under further pressure by the strong increase in Gilt yields since January. Borrowing is anticipated to be higher in the short-term, due mostly to an increase in interest costs as well as near-term policy including increased spending on defence of GBP2.2bn in 2025-26, in an effort to see defence spending hit 2.5% of GDP by 2027. The GBP9.9bn margin remains; the Office of Budget Responsibility expects the government will reach its target with 54% certainty. Net debt is still anticipated to remain just below 100% of GDP over the forecast period.
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