It was a heavy-duty week of events domestically as Australia's fiscal and monetary policymakers featured prominently. On Tuesday, Treasurer Josh Frydenberg presented Federal Budget 2020/21 which contained an additional $41.4bn of new measures to impact in the current financial year following on from the $118.4bn of announcements included in the July Economic and Fiscal Update (reviewed here). All up, this elevates the scale of the Government's economic support measures to 7-8% of GDP in 2021/21, which, given the severity of the shock sustained by the domestic economy from the emergence of the pandemic, is a response of an appropriate magnitude. As expected, there was a material deterioration in the projection of the budget deficit for 2020/21 from $184.5bn (9.7% of GDP) as of July to $213.7bn (11% of GDP), widening from a deficit of $85.3bn in 2019/20 (see chart of the week, below). Although this sees Government net debt rise sharply from its pre-pandemic level of around 19% of GDP to 36.1% of GDP by the end of the current financial year, the interest cost of this debt is at historically low levels.
Chart of the week
The focus of Budget 2020/21 was around providing incentives for firms to hire and invest and boosting household income. Included is a new hiring credit scheme for firms to take on previously unemployed young workers, while there was an expansion of the wage subsidy policy for new apprentices and trainees. On investment, 99% of Australian firms will now be able to fully write-off depreciable assets (unlimited in number and value) in the year they are installed through to June 2022, while to support cash flow the Government has introduced temporary carry-back provisions that will enable firms to offset losses incurred against profits made since 2018/19. Household income receives a much-needed boost through the earlier introduction of the Government's Stage 2 tax cuts and retention of the low- and middle-income offset for 2020/21. The key assumptions contained in the budget were for a 1.5% contraction in GDP in the current financial year to turn to a 4.75% rebound in 2021/22 supported by earlier stimulus and as a virus vaccine becomes widely available allowing the economy to open up more widely and restoring activity and employment.
At this week's RBA meeting, the Board left policy settings unchanged (0.25% target for the cash rate and 3-year Commonwealth bond yield and 0.25% on the Term Funding Facility), though the tone of the statement from Governor Philip Lowe continued the theme common in the Bank's recent communications in outlining a preparedness to provide more support to the economic recovery (see here). At the forefront of the Board's thinking is the labour market with the statement noting that it views reducing the high level of the unemployment rate as "an important national priority" and to that end, it "continues to consider how additional monetary easing could support jobs as the economy opens up further". The statement also acknowledged the move in market pricing that has an easing in monetary policy at the November meeting as its base case. The expectation is that the Board will lower its interest rate structure by 15 basis points to target 0.1% on the cash rate and 3-year segment of the yield curve and reduce the cost of liquidity to the banking sector under the Term Funding Facility (TFF) to 0.1%. There is also some speculation that an expansion of its bond-buying activity could be announced, which would be more directly at the 5-10 year segment of the curve. It will be of interest going forward to gauge how the Bank views the effectiveness of each of the various tools it is currently using. This week's statement for example emphasised the role that the TFF was playing in boosting liquidity to lower borrowing costs, reinforcing that the Board announced an expansion to the program at the September meeting. The RBA this week also published its latest half yearly Financial Stability Review, which outlined that the despite the risks to the outlook, not least from the pandemic, the strong position of domestic banks' balance sheets would contribute to the continuation of lending to help sustain the economic recovery. On the data this week, housing finance commitments soared at a record monthly pace of 12.6% in August driven by policy stimulus measures (see here), while the nation's trade surplus narrowed to a 2-year low at $2.6bn in August with imports gathering pace as the economy reopens (see here).
In terms of developments offshore, markets remain focused on the lead-up to November's presidential election in the US and the on again off again narrative around prospects for a near-term fiscal stimulus package. By week's end, this was more weighted to being on again than not with the Republicans and Democrats showing a renewed willingness to coming a little closer to agreeing on the scale of the package required. Another theme of importance is the virus situation in Europe where the case count is on the rise to levels well above the first wave earlier in the year and although governments in the region are reluctant to return to widespread shutdowns again, various restrictions on activity are being reimposed and based on the prior episode this will weigh on sentiment and slow the path of the economic recovery. With data limited in both the US and in Europe this week, markets instead focused on the latest commentaries from the Federal Reserve and European Central Bank. The minutes from the Fed's FOMC meeting in mid-September highlighted that the Committee generally anticipated that additional fiscal stimulus would be forthcoming, though if that expectation were not to be realised then the risk was that the momentum in the recovery would slow. In light of the Fed's recent shift to an average inflation targeting regime, some members were in favour of the Committee providing greater clarity to markets around its asset purchases and how this would contribute to meeting its objectives of maximum employment and price stability. The account of the ECB's Governing Council meeting in early September appeared to convey a greater degree of caution than initially interpreted by markets following President Christine Lagarde's post-meeting press conference on the day. Members of the Governing Council agreed that strength in the single currency posed risks to both the growth and inflation outlook. Specifically on the latter, the most recent easing in the ECB's monetary policy stance in June through the expansion of its pandemic emergence purchase programme (from €750bn to €1,350bn) was seen as helping to lift inflation expectations, though a stronger euro could risk offsetting this.
