Australia Presses for Nation Building But Forecast Doubts Linger
Comment of the Day

May 09 2017

Commentary by Eoin Treacy

Australia Presses for Nation Building But Forecast Doubts Linger

This article by Michael Heath for Bloomberg may be of interest to subscribers. Here is a section:


Morrison is changing the terms of the economic debate, from dire warnings on debt and deficit to a more politically astute one of prosperity and opportunity. His infrastructure plan aims to create a virtuous circle: such investment may trigger private-sector spending and increased household consumption that would boost the economy.

“We continue to forecast a slower deficit consolidation than projected in the budget,” Marie Diron, associate managing director at Moody’s Investors Service, said in a statement after the release. “We assume that GDP growth will be somewhat slower than projected by the government, at 2.5-2.7 percent in the next few years. Productivity growth has slowed in Australia, like in other high-income economies. We estimate that this slowdown is partly related to long-lasting factors that will continue to weigh on growth.”

Infrastructure projects include a new airport in Western Sydney; acquiring greater or outright ownership of the Snowy Mountains hydroelectric scheme and then expanding it; upgrading highways across the nation; and funding for a Melbourne-to-Brisbane inland railway.

Eoin Treacy's view

The Australian economy has gone 25 years without a recession which is an incredibly impressive achievement. In that time the currency has been highly volatile; acting as a pressure release valve. The decision to spend A$75 billion in infrastructure projects will help to absorb some of the available labour that the drop off in commodity supply growth investment has left but the outright effort to stoke inflation through wage growth is likely to take a toll on both the currency and bond yields. 

The Australian Dollar has been largely rangebound for the last year, following what had been a persistent decline. It failed to hold the 77¢ area in February and is now falling back towards the lower side of the range above 70¢. While that area represents an area of potential support, a clear upward dynamic will be required to signal the congestion area is going to persist. 

Australian government bonds continue to enjoy a substantial spread over comparable sovereign debt elsewhere. However with US interest rates rising, that difference is tightening. 2-year yields have been ranging below 2% since early 2015 and firmed over the last couple of weeks from the 1.6% area to test the region of the trend mean.  A sustained move above 2% would confirm a change of trend. 

For 10-year yields 3% is has been an important of support and more recently resistance and remains an important psychological level. 

The S&P/ASX 200 has paused in the region of the 2015 peak near 6000 and will need to hold the region of the trend mean during the current consolidation if medium-term scope for continued upside is to be given the benefit of the doubt. 

The important S&P/ASX 300 Banks index pulled back sharply over the last few sessions and is now testing the region of the trend mean. A clear upward dynamic will be required to confirm support in this area.

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