ANZ Warning: The Federal Budget Could Derail The Recovery

Getty/Shaun Botterill

There is so much to say about the recovery in the Australian economy at the moment.

Clearly the data shows that monetary policy is working but it also shows the recovery is uneven.

So as we head to next week’s budget, here’s a timely warning from the ANZ on the risks of an overly tight fiscal contraction as the Government seeks to force the budget back toward balance sooner than perhaps the economy can handle.

The effects of stimulatory monetary policy continue to flow through the Australian economy and we remain cautiously confident that the transition to non-mining sources of growth is occurring. Momentum in the housing sector continues to drive prices higher, building approvals remain on an up-trend and consumer spending has continued to strengthen. Offsetting this emerging strength in the interest-rate sensitive areas of the economy, are falling mining investment, contractionary fiscal policy and the ongoing effects of a business efficiency drive and some industry restructuring. We continue to expect that the combined impact of these factors is likely to keep monetary policy on hold this year.

We continue to see the key risks to the outlook to be the failure of non-mining business investment to pick up, or a sharpstep down in Chinese growth. However, with a tight Commonwealth Budget looming, there is some risk that the mix of policies could hit confidence and spending and potentially derail or delay the current fragile recovery.

Messrs Hockey and Cormann, are you listening?

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