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2022 Australian Federal Budget
Investment implications
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Implications for investments
Australia is once again facing economic headwinds with the lingering effects of the pandemic itself and the stimulatory responses, as well as floods in NSW and Queensland, and the Russia-Ukraine war. This is leading to concerns on both national and economic security, as well as a focus on energy prices and cost of living.
Re-election intentions aside, the 2022/23 Federal Budget could be viewed as attempting to balance short-term issues such as a response to rising inflation (through the temporary reduction in fuel tax and other targeted assistance to lower income earners) and longer-term structural challenges of the need for infrastructure and environmental issues, deficit and debt reduction and significantly increased defence spending. From an investment perspective, the benefits will be very sector specific.
Mercer’s Perspective – a lucky country once again?
Recent economic data indicates Australia - and indeed most of the developed world - was already facing increased inflationary pressure, even before the Russia-Ukraine crisis exacerbated the rise in energy prices.
Yet as a country, Australia’s position remains relatively sound. Higher energy and commodity prices benefit Australia’s position as a net exporter. In addition, Australia’s unemployment rate is sitting at 4 per cent in February, the lowest since August 2008. So far there is no sign of low unemployment translating into large wage increases, with average wages in the 12 months to December 2021 growing by just 2.3%. This subdued wage growth is in stark contrast with the US, where annual growth is close to 9%.
Inflation as of Dec 2021 stood at 3.5% year on year with a trimmed mean of 2.6%, which is well below US levels of 8%. While this is above the RBA’s 2-3% target range, the RBA may lag other central banks in raising interest rates. We expect inflation to move above 4% in 2022, before reducing once geopolitical tensions subside.
Priorities for the Australian government and the Federal Budget are ensuring people are feeling safe in their country and safe to get back to work. Hence the Budget’s focus on reducing the cost of living by a temporary cut to fuel tax, like many other developed countries, and increasing defence spending - expected to reach 2.1 per cent of GDP. $38 billion will be spent out to 2040 to recruit 18,500 new soldiers in the biggest military expansion in four decades to “keep Australians safe” with rising geopolitical tensions.
Australia’s government has the capacity to tackle these megatrends as its debt level – while high in an historical context with net debt at 31.1% of GDP – nonetheless still ranks favourably against other developed nations. Australia has a triple-A sovereign rating and in addition, there is no doubt that the RBA policies are supporting the serviceability of debt in Australia.
While the chances of stagflation have increased, inflationary growth remains our base case, with Australia’s GDP expected to grow around 3.8% in 2022. We expect the Ukraine crisis to temper growth but not derail it. Our recent update navigating an international crisis and market implications provides more detail on the impact to markets. Notwithstanding recent poor consumer sentiment signals, consumers remain flush with cash and businesses are keen to return to normal life.
The highly infectious BA.2 sub-variant is becoming the dominant COVID-19 strain in Australia and reducing the available workforce, but immunity levels from the high vaccination rates and previous infections should generally protect against severe illness and minimize further economic shocks.
This content is intended to inform clients of Mercer’s views on particular issues. It is not intended to be provided to any person as a retail client and should not be relied upon or used as a substitute for professional advice specific to a client’s individual circumstances. Whilst Mercer believes the prospective information and forward looking statements made by Mercer in this report are based on reasonable grounds, they are predictive in character and may therefore be affected by inaccurate assumptions or by known or unknown risks and uncertainties. This content has been prepared by Mercer Consulting (Australia) Pty Ltd (MCAPL) ABN 55 153 168 140, Australian Financial Services Licence #411770. Any advice contained in this content is of a general nature only and does not take into account the personal needs and circumstances of any particular individual. Prior to acting on any information contained in this content you need to take into account your own financial circumstances, consider the Product Disclosure Statement for any product you are considering and seek advice from a licensed, or appropriately authorised financial adviser if you are unsure of what action to take. ‘MERCER’ is a registered trademark of Mercer (Australia) Pty Ltd ABN 32 005 315 917.
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