Tough federal budget to hit consumer confidence, say economists

Treasurer Joe Hockey reads the budget coverage in the newspapers with assistant minister for Infrastructure Jamie Briggs. Photo: Andrew MearesFederal budget 2014: Full coverage

Economists say that the government’s tough budget could drive confidence to recession levels and delay future interest rate hikes until late next year.

Their assessment comes as the government prepares to issue $36 billion in new bonds to help get the economy back to surplus.

“This budget, which does contain a reasonably broad-based tightening of fiscal policy, can only mean that rates will stay lower for longer or when they do go up they will go up more gradually,” said ANZ chief economist Warren Hogan.

Mr Hogan said he will be closely watching consumer confidence levels over the coming weeks, given that they are dangerously close to recession levels.

The market is pricing in a 44 per cent chance of a rate hike by the Reserve Bank in the next 12 months.

Higher rates have an impact on borrowing costs and the interest rate associated with the paying back of new government debt, in that it will make it slightly more expensive.

On Tuesday night Treasurer Joe Hockey declared that it was time all Australians acted in the national interest and did their part by contributing to a better Australia with less debt.

To get there, he announced cuts to welfare, pensions, a debt tax as well as higher petrol and medical prices – all of which would help the government cut the nation’s net debt from a forecast peak in 2017-2018 of $264 billion to around $1 billion -$2 billion within a decade.

The government issued a statement on Wednesday, outlining its intentions to issue $63 billion of nominal bonds to help repay the debt, with $36 billion in net issuance given that $27 billion is set to mature.

A further $4 billion of inflation-linked bonds will also be issued for the 2014-15 financial year.

Economists at both Westpac and National Australia Bank expect rates to move higher at the end of 2015, while ANZ thinks rates will move higher in the first half of next year.

The official cash rate is currently at 2.5 per cent and hasn’t moved since last August last year when it was cut by 25 basis points.

BT Investment Management head of income and fixed interest Vimal Gor said the cash rate was unlikely to move higher until the end of 2015, given that economic growth is likely to slow because of some of the measures announced in Tuesday’s budget.

“The key thing from the budget is that it impacts an already weak household sector. Rates are unlikely to rise until the end of 2015, at the earliest,” he said, adding that this may exacerbate the level of gearing among corporates and at the household level as people take on more risk in pursuit of yield given economic growth is slow.”

A key measure of confidence, the ANZ-Roy Morgan weekly consumer confidence index fell by 4.2 per cent to 106.3 points in the week ending May 4 – this is currently below the average reading of 113 points and is the worst since the global financial crisis.

UBS interest rate strategist Andrew Lilley said the tightening up of the budget deficit has been just enough to protect Australia’s reputation as the gold-plated AAA sovereign, but not by so much that foreign investors would need to fear a currency collapse from a potential recession.

“Global central banks were happy to increase their holdings of Australian bonds last year, when issuance was at an all-time high. Given this year’s reduction in net issuance of around 20 billion, I think if anything we will see Australian government bonds regain a bit of their scarcity value in this coming year,” he said.

The government gross issued $80 billion of nominal and $5 billion of inflation linked bonds this financial year, but some of that was just rolling over maturing debt. The total market size of nominal and inflation linked bonds grew by $57 billion and $5 billion in net terms.

Ratings agency Standard and Poor has reaffirmed Australia’s AAA rating in the wake of the budget, despite expectations of a slower return to surplus than was projected a year ago.

UBS Australia chief economist Scott Haslem said budget struck a reasonably good balance between improving the fiscal outlook without tightening too much this year at the risk of halting economic growth.

“Total fiscal drag in 2014 should be around 0.25 per cent, which is not enough to risk de-railing growth but is enough that the Reserve Bank of Australia is now likely to keep interest rates on hold until 2015,” he said.

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