Sources: Reuters

SYDNEY (Dec 18): Australia's government on Wednesday trimmed its likely budget deficit for the current fiscal year, but flagged bigger shortfalls ahead due to "unavoidable spending" on health, cost-of-living relief and veterans care.

Facing a tough election next year, the centre-left Labor government said the economy had slowed under the weight of high interest rates and elevated inflation, but insisted public spending would help ensure a soft landing.

Recent data for the third quarter showed that without public investment in infrastructure and rebates on electricity costs, the economy would have been in recession.

In its Mid-Year Economic and Fiscal Outlook (MYEFO), the government still had to trim its forecast for economic growth in the current fiscal year to end June 2025 to 1.75%, down from 2.0% in its main Budget last May.

Wage growth was also marked down to 3.0% in a blow to government claims it would deliver faster pay gains than the Liberal National opposition.

The economic slowdown was enough for the Reserve Bank of Australia (RBA) last week to open the door to policy easing, having held interest rates at 4.35% for all of this year.

Treasurer Jim Chalmers on Wednesday suggested more cost of living relief could be on the way, on top of the tax cuts, electricity rebates, cheaper medicines and other policies the government has already delivered to date.

"From budget to budget, if we can afford to do more and there is a case to do more to help people with the cost of living, of course then we will consider that," Chalmers said in a press briefing.

All this government spending meant its budget was back in deficit after two years of rare surpluses, though the shortfall this year was not as large as first feared.

The Treasury projected a deficit of A$26.9 billion (US$17.04 billion or RM76.06 billion) for the current 2024/25 year. That compared with a forecast of A$28.3 billion in its main Budget last May.

From there, the red ink only gets worse due to A$25 billion in extra payments. The projected deficit for the three years to 2027/28 is now A$117 billion, or A$23 billion more than expected in May.

"The slippage in subsequent years is largely because of urgent, unavoidable or automatic increases in spending in areas like pensions, Medicare and medicines," Treasury said in a statement.

Expected tax revenues from companies have also been downgraded as subdued demand in China weighs on prices for some of Australia's main commodity exports, notably iron ore. It retained the long-term iron ore price assumption at US$60 per tonne by the third quarter 2025, compared with US$104 per tonne currently.

The government's net debt was now seen expanding to A$1.16 trillion by 2027/28, from an expected A$940 billion this year. At 36.7% of gross domestic product, net debt would still be low by international standards.

Estimated overseas migration has been revised up to 340,000 for the 2024/25, from 260,000, as the government struggled to bring migration to more sustainable levels.

Source: Theedgemarkets

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Much of the last month’s growth in retail trade was due to a sizeable increase in sales of vehicles and parts, which rose by 2.6% m/m. Sales at gasoline stations edged up just 0.1%, weighed down by lower prices at the pump. Sales at the building materials and equipment stores increased for the sixth consecutive month (+0.4%).

Sales in the “control group”, which excludes the volatile components above (i.e., gasoline, autos and building supplies) and is used in the estimate of personal consumption expenditures (PCE), rose 0.3% m/m, an acceleration relative to 0.1% gain in October.

Sales at non-store retailers increased by 1.8% and were up 9.7% on a year-over-year basis, making it the fastest growing category. Online sales continue to increase as a share of total sales, reaching 20% in November. In contrast, sales growth was soft at the general merchandize stores (-0.1%), with weakness concentrated in department store sales (-0.6%).

Food services & drinking places – the only services category in the retail sales report – declined by 0.4%. October’s data was revised up to 0.9% (previously 0.7%).

Key Implications

U.S. consumers are finishing 2024 in strong financial shape. A rally in equity markets and gains in home prices have bolstered household wealth. While job growth has slowed, the labor market remains healthy and continues to generate jobs. Consumer confidence has also improved, especially following Trump’s election victory, with the prospect of lower taxes lifting households’ spirits. For this quarter, we expect inflation-adjusted consumer spending to increase by 3% (annualized), a small step down from 3.5% in Q3 but still strong growth.

Inflation, however, remains an issue. Nominal retail sales are up 3.8% from the year ago but the picture looks less upbeat after adjusting for inflation, with sales up just 1%. The latest uptick in inflation reaffirmed that progress in bringing inflation lower is stalling, and the coming year could bring more inflationary surprises, due to potential tax cuts, tariffs, and changes in immigration policy. These factors would likely prompt the Fed proceeding more cautiously next year, leading to higher interest rates for consumers than otherwise would be the case. Along with a slowing labor market, these are some of the reasons why we expect consumer spending to moderate to a trend-like pace of 2% next year (forecast).