April 2, 2019 / 9:53 AM / 3 months ago

Australia economy seen stretching record run as budget back in black

CANBERRA (Reuters) - Australia is expected to extend its enviable recession-free run of growth into a third decade, the government said on Tuesday even as it downgraded forecasts for coming years.

FILE PHOTO: Australian dollars are seen in an illustration photo February 8, 2018. REUTERS/Daniel Munoz/File Photo

Despite that, the government was able to promise a return to budget surplus in 2019/20 starting July 1, the first since 2007/08 before the global financial crisis hit.

The improving budget position enabled the government to announce tax cuts and increased health, education and infrastructure spending ahead of a national election due to be called for mid-May.

“With the economy dragging its feet - recording some of the weakest growth this side of the global financial crisis - it could rightfully be argued that a budget surplus is not what the economy needs right now,” said Callam Pickering, economist for job site Indeed.

“With the budget in good shape there was plenty of scope to do more.”

Australia’s central bank is counting on some fiscal stimulus to boost the slowing economy and lift weak consumer spending, with an increasing number of analysts predicting cuts to the official cash rate later in 2019.

TD Securities analyst Annette Beacher said the “targetted fiscal stimulus” in the budget - which includes A$15 billion worth of tax cuts over 2021/22 - negates the need for the Reserve Bank of Australia (RBA) to ease policy.

Just hours before the budget statement, the RBA kept rates at a record low 1.50 percent for a 32nd straight month.

It dropped a previous call for 3 percent economic growth this year, following disappointing data for late 2018, but reiterated that the jobs market remained strong.

Subdued economic data also led the government to downgrade its forecasts. Growth was projected at 2.25 percent in the current financial year, then 2.75 percent in the next two years.

Frydenberg pointed to some “clear and genuine risks” at home and abroad even as the base case was for the economy to continue its uninterrupted growth run.

“The residential housing market has cooled, credit growth has eased and we are yet to see the full impact of flood and drought on the economy,” he said.

Frydenberg also noted threats to Australia’s export-heavy economy from global trade tensions and China’s growth slowdown.

The return to surplus together with the tax largesse failed to cheer investors with the Australian dollar trading near the day’s low at $0.7076. The Aussie had slipped after the RBA’s decision.

A FANTASY?

The unemployment rate, which fell to an eight-year low of 4.9 percent in February, is seen at 5 percent over the forecast period.

Consumer price inflation is seen at 2.25 percent in 2019/20 before hitting the midpoint of the RBA’s 2-3 percent medium-term target next year.

And wages growth is forecast to rise to 3.25 percent by 2020/21 from the current 2.1 percent.

“This budget is...a cynical attempt to buy votes,” said Michele O’Neil, president of the Australian Council of Trade Unions, calling the government’s wage forecasts “a fantasy”.

($1 = 1.408 Australian dollars)

Reporting by Swati Pandey; Editing by John Mair and Richard Borsuk

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