GOLDMAN SACHS: Years Of Fiscal Consolidation Await Australia, Rate Cut More Likely Next Month

There are some increasingly uneasy views from some important quarters about the state of Australia’s economy.

Wayne Swan has been busy managing down expectations ahead of the federal Budget in three weeks’ time, revealing revenues have taken a $7.5 billion “sledgehammer” because of the high dollar and lower terms of trade. The Coalition, meanwhile, has abandoned its pledge to deliver Budget surpluses if elected.

Today Goldman Sachs revised its economic forecast, saying there’s a strong case now for the Reserve Bank to cut official interest rates after the CPI figures came in lower than expected.

Many economists had seen June or July as a likely time for a rate cut but Goldman Sachs sees the economy as in need of more urgent stimulation.

In a research note full of grim observations GS points out inflation has been coming in lower than expected for five out of the last six quarters (see the chart below) and it is getting harder to identify inflationary pressures in the economy.

Goldman’s economic team now say the RBA is likely to cut the target cash rate by 25 basis points in May. They expect another cut in November.

From the note:

Politically, it is clear that both sides of politics remain conflicted between striking the balance between providing a credible path to fiscal neutrality and supporting economic activity. An extended election campaign and little detail on the policy mix that a potential change of government delivers risks diminishing the economic traction that monetary policy has sought to establish. It is difficult to imagine the May Federal Budget as providing sufficient economic clarity to underpin economic and fiscal direction. Indeed, the most likely message from the Budget is that the fiscal deterioration suggests a multi-year period of fiscal consolidation now awaits Australia. As such, the burden increasingly falls on the RBA to continue to nudge the non-mining economy to a sustainable cyclical recovery.

The emphasis is Goldman’s.

It also notes that global economic data has been deteriorating and that there are deflationary effects coming down the track from declining commodity prices. Wage inflation, too, is likely to remain moderate, GS says, as unemployment is to tick over the 6% mark next year.

Elsewhere today, the Minerals Council of Australia released some research saying a one-off cut of $15 billion in government payments is needed to rebalance the budget as the peak of the mining boom passes.

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