AUSTRALIA Lower deficits still in train, arriving late - - - /5 /7-5 -5 Jun-9 Jun- Jun Jun-8 Jun Jun Jun- Revenue recovery remains sluggish 7 5 Australian Federal : Underlying Balance ( of GDP) 5/ Spending restraint to continue / Aug Jun-9 Jun- Jun Jun-8 Jun Jun Jun- 7 5 Australian Federal : Revenues ( of GDP) Aug MYEFO Dec /5 5/ /7 Australian Federal : Spending ( of GDP) 5/ MYEFO Dec /7 Aug /5 Jun-9 Jun- Jun Jun-8 Jun Jun Jun- Source: Treasury, ABS, Macquarie Research, May May Macquarie Securities (Australia) Limited - 7 5 7 5 /7 careful consolidation Event The 7 deficit forecast has widened to $7.bn (. of GDP), with the fiscal and economic projections implying a continued contractionary impulse on the economy. Impact Fiscal policy will remain a drag on the economy in the budget year and through the forward estimates. There has been a slight moderation in pace, but the budget remains on track for a surplus, now predicted in. The budget-neutral nature of the policy changes highlights the lack of macro support from the budget. But the further softening of the communication around policy direction does mean there is unlikely to be a hit to confidence. Outlook This is clearly crafted as an election budget. The policy mix appears carefully calibrated for optimal electoral reception over coming weeks. Additionally, the contains the usual hidden electoral announcements in the decisions taken but not yet announced. Relative to the MYEFO starting point, our assessment is that the is likely to have a relatively neutral impact on the economy from a macro perspective. The three key questions we were looking to for answer from the were: whether it would boost the economy; whether the fiscal impulse delivered would be enough to offset the need for rate cuts and currency depreciation; and the likelihood of downside impacts to confidence. The Government s own economic forecasts, which have been revised and are in line with our expectations (see slide 55 in Link), highlight that the does not imply a substantive pickup in domestic activity until FY8. On our estimates, the government s forecast for public demand the segment of the economy it should know best is relatively subdued, with its contribution to growth remaining -5bp below the long-run average levels. Whilst there appears to be a lot of change across the budget, the net impacts have not significantly altered the bottom line. The budget remains on track for surplus. As the subdued public demand profile highlights, the expenditure constraint is a key component of the fiscal consolidation path. But the continuation of fiscal consolidation through the forward estimate period highlights that the fiscal impulse remains negative. Repairing the budget imposes a cyclical toll on the economy. Over FY5/ and FY/7 the fiscal impulse is marginally smaller than that anticipated at the MYEFO. But this is offset by a slightly larger impact in FY7/8. Bottom line: the budget estimates imply an ongoing lack of macro support, leaving the task of adjustment in the RBA s hands. There s no fiscal catalyst to change our view on rates. The RBA has further work to do. From a confidence perspective, we would not be surprised to see the being relatively well received. However, the communication task over coming days, and weeks through the approaching election campaign ( July poll), can and has in the past undo prospective sentiment boosts. (continued...) Please refer to page for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Forecasts Macquarie Wealth Management From a ratings perspective, there would appear to be little to suggest that Australia s AAA rating is under threat. The implies a path back to a structural surplus over the medium term (see figure 8), with the slippage in the surplus date (from FY9/ to FY/) a reflection of weaker near term nominal GDP growth. Net debt remains on track to peak below (see figure ). In our view, a threshold for concern for Australia would be something close to -5, which is below the standard advanced economy threshold, reflecting our larger primary (agriculture & resources) production sector and linkages to China. Fig Public demand set to remain subdued, leaving the economy s rebalancing to the RBA & A$. Fig Marginally gentler fiscal impulse expected in FY5/ & FY/7, offset by larger FY7/8 drag... Australia: Public demand - contribution to GDP growth (year average change, CVM measure) GFCF Consumption Public demand yr Average.. Australian Federal : Fiscal impulse ( of GDP) MYEFO Dec 5 /7.8 (f).8. Macq (f)... -. -. - / / /7 9/ / Jun-8 Jun-9 Jun- Jun Source: Treasury, ABS, Macquarie Research, May Source: Treasury, ABS, Macquarie Research, May - Fig Net debt is expected to peak at 9. of GDP in FY7/8. The budget retains significant fiscal space. Fig Despite an expectation of solid job growth, forecasts for household earnings growth remain weak. 8 8 Australian Federal : Net Debt 5/ ( of GDP) /5 Aug / /7 8 8 - - Employment growth - - - - Jun-9 Jun Jun- Jun Jun Jun-9 Jun-9 Jun-98 Jun- Jun- Jun Jun Jun8 Source: Treasury, ABS, Macquarie Research, May Source: Treasury, ABS, Macquarie Research, May 9 Australia: Employment & Earnings growth (year average change) Compensation of Employees Bus. cycle averages forecasts 9 May
Fig 5 Economic parameter changes (forecast revisions) have added to the bottom line, whilst policy decisions including some not yet announced produced net savings. Source: Treasury, Macquarie Research, May May
Fig Treasury s domestic macro forecasts. Source: Treasury, Macquarie Research, May May
Fig 7 Key budget aggregates. Source: Treasury, Macquarie Research, May Fig 8 Longer-run budget balance projections. Source: Treasury, Macquarie Research, May May 5
Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return > in excess of benchmark return Neutral return within of benchmark return Underperform return > below benchmark return Benchmark return is determined by long term nominal GDP growth plus month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+ Neutral expected return from to + Underperform expected return < Macquarie South Africa Outperform expected return >+ Neutral expected return from to + Underperform expected return < Macquarie - Canada Outperform return >5 in excess of benchmark return Neutral return within 5 of benchmark return Underperform return >5 below benchmark return Macquarie - USA Outperform (Buy) return >5 in excess of Russell index return Neutral (Hold) return within 5 of Russell index return Underperform (Sell) return >5 below Russell index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least in a year. Low medium stock should be expected to move up or down at least 5 in a year. Low stock should be expected to move up or down at least 5 5 in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending March AU/NZ Asia RSA USA CA EUR Outperform 5. 59.9.7.7.. (for global coverage by Macquarie,.7 of stocks followed are investment banking clients) Neutral. 5.. 9.9. 5. (for global coverage by Macquarie,.79 of stocks followed are investment banking clients) Underperform 5.5 5.. 5. 9. 8.78 (for global coverage by Macquarie,. of stocks followed are investment banking clients) Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures. Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. 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