AUSTRALIAN MID-YEAR ECONOMIC UPDATE - GROWTH, SURPLUSES

UNCLAS SECTION 01 OF 02 CANBERRA 001121

SENSITIVE
SIPDIS

DEPT FOR EAP/ANP

TAGS: ECON EFIN AS
SUBJECT: AUSTRALIAN MID-YEAR ECONOMIC UPDATE - GROWTH, SURPLUSES
DOWN

REF: A) CANBERRA 1036; B) CANBERRA 1076; C) CANBERRA 1114


1. (SBU) Summary. On November 5, Treasurer Wayne Swan released the
Mid-Year Economic and Fiscal Outlook (MYEFO) 2008-09, the annual
update to the Australian Government's budget for the 2008-2009
fiscal year, which runs from July 1 to June 30. The update lowered
the estimated growth rate from 2.75% to 2.0% in 2008-09 and 2.25% in
2009-10. Tax receipts for the next four years are projected to be
A$40 billion lower due to slower growth resulting from the
longer-term impact of the global financial crisis. The unemployment
rate is forecast to rise from its current 4.3% to 5% by the June
quarter of 2009. The projected budget surplus for 2008-2009 has
been revised downward to A$5.4 billion (0.5% of GDP) from the
original estimate of A$22.7 billion, though this includes A$10.4
billion spent on the government's economic stimulus package (ref A).
Many believe the growth figures are too optimistic. End summary.

IMPACT OF THE GLOBAL CRISIS ON THE BUDGET


2. (U) Budget surplus projections from the Treasury are much lower
than at the time of the May budget and reflect the dramatic impact
of the global financial crisis. In the MYEFO, Treasury forecasts an
A$5.4 billion surplus in 2008-09 (0.5% of GDP),down from original
forecasts of A$22 billion; the biggest hit for the current fiscal
year budget is the A$10.4 billion stimulus package announced in
October (ref A). Almost all of the decrease in the predicted
surplus beyond 2008-09 is due to reductions in revenue associated
with the global financial crisis. Expected tax receipts have been
revised down by A$4.9 billion in 2008-09, A$12.2 billion in 2009-10,
A$12.4 billion in 2010-11 and A$7.9 billion in 2011-12. Revenues
from capital gains taxes are expected to be significantly lower, and
receipts from the company tax in 2008-09 are expected to be A$4.5
billion lower. The complete Mid-Year Economic and Fiscal Outlook is
available at: http://www.budget.gov.au/2008-09/
content/myefo/download/MYEFO_2008_09.pdf

(Ignore space inserted between "09?" and "content" to satisfy cable
format requirements.)

OUTLOOK FOR TRADE AND COMMODITY PRICES
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3. (SBU) Treasury has revised downwards its outlook for commodity
prices, and now predicts Australia's terms of trade will fall from
its current peak levels by 8.5% in 2009-10. Prices for base metals
have fallen sharply on the spot market, well below current contract
prices. The depreciation of the exchange rate will dampen the falls
in Australian dollar terms, but the terms of trade are expected to
decline from recent peaks in 2009-10. The current account deficit
is forecast to improve from 6% of GDP in 2007-08 to 4.5% in
2008-2009. Net exports are expected to subtract .5 of a percentage
point from GDP growth in 2008-09 (smaller than the 1 percentage
point forecast in May). The change largely reflects a weaker
outlook for imports, as slowing domestic activity and a lower
exchange rate act to slow demand for imports. In contrast, the
outlook for exports is slightly stronger than at Budget. The
narrowing of the current account deficit reflects higher saving to
GDP ratio as households rebuild their balance sheets, coupled with a
slowdown in growth of national investment.

MACROECONOMIC INDICATORS
--------------


4. (SBU) The MYEFO predicts that high inflation will persist.
Headline inflation recently reached 5 per cent over the past 12
Qmonths (4.8% annualized) but will moderate as global growth slows,
flowing through to lower global oil and food prices. Inflation is
expected to fall to 3% in 2009-10. Wages are expected to grow by
4.25% to June 2009 and will then moderate. The unemployment rate is
forecast to rise to 5% by the June quarter 2009 and 5.75% by the
June quarter 2010. Business investment growth is expected to slow
to 5.5% in 2008-09, down from the 8.5% projected in May.

RECENT POLICY MEASURES
--------------


5. (SBU) The Rudd Government has put in place a wide range of
proactive measures, including the guarantee of bank deposits (ref B)
and bank wholesale funding and the A$10.4 billion Economic Security
Strategy (ref A) to protect households and financial institutions
from the global financial crisis. Lower borrowing costs (interest
rates have been cut 2 points over the last two months, ref C).
Since the 2008-09 Budget was issued in May, total policy decisions
in 2008-09 have decreased the underlying cash balance by A$11.1
billion and the fiscal balance by A$11.5 billion

COMMENT

CANBERRA 00001121 002 OF 002


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6. (SBU) The GOA still projects growth of about 2% for the current
fiscal year. We agree with many of our contacts, who suspect that
this is putting a too-brave face on the situation. Discussing this
on November 5, one industry association economist told econoff that
he thought 1% growth was much more likely for the current fiscal
year. A number of financial market analysts are even more
pessimistic, with several seeing even recession as a distinct
possibility, and some forecasting unemployment as high as 9%.
Treasury states that the budget position has deteriorated but
predicts continued surpluses. Non-government economists scoff at
the notion that the budget will not go into deficit, and some are
calling for deficit spending to boost the economy. Although some
level of deficit spending would probably be wise in the face of a
global downturn, we sense the Rudd Government may be reluctant to do
so for fear of being attacked by the Opposition - even if they do
maintain budgetary surpluses over the business cycle, as Treasurer
Wayne Swan has carefully promised. End comment.

MCCALLUM