Rising petrol costs could wipe out Scott Morrison's income tax cuts

Scott Barbour/Getty ImagesScott Barbour/Getty Images

One of the big stories in global financial markets at the moment is the rising price of oil.

Crude prices have climbed by more than 25% since mid-February, as OPEC’s ongoing production cuts re-balance the global supply picture while renewed tensions in the Middle East have also helped push prices higher.

This is feeding into petrol prices in Australia and strategists at Morgan Stanley say it has the potential to gobble up the small increases to household incomes from the planned tax cuts unveiled last week in the federal budget.

The tax changes equate to around $10 per week to low and middle income earners who receive the maximum benefit. It would be $530 paid as a lump sum in a rebate.

But Morgan Stanley’s analysts argue that oil prices might be re-basing at a higher level and that costs of a range of essentials are rising faster than wages. Adding in a weakening Australian dollar, the impact of the tax cuts would be wiped out by the time they take effect in 2020.

Here’s Morgan Stanley’s Chris Nicol and team in a note to clients:

… wages growth remains weak at 1.3- 2.1% yoy, compared with our assessment of ‘essentials’ costs at 3.1% yoy, while additional headwinds from rising petrol prices emerge. Morgan Stanley’s energy strategists remain bullish on crude, and the impact of high prices could be accentuated by further falls that we forecast for the AUD/USD. Standard unleaded petrol prices have moved up from an average A$1.33/L in FY18 YTD to A$1.46/L… If sustained, this would add around 0.3ppt to inflation, and equate to a around a A$3.7bn ‘tax’ on consumers in FY19.

A similar but less dramatic situation is playing out in the US, with Morgan Stanley expecting about one-third of recent US income tax cuts being absorbed by current pump prices.

“We see a far larger drag in Australia, with no compensation in FY19, and FY20 income tax cuts more than absorbed by >A$1.50/L petrol,” the analysts write.

They share this chart that shows how retail sales growth rises and falls in an opposite direction to petrol prices.

Morgan Stanley

All of it feeds into a familiar theme in Australian economics: households are under pressure and finding it hard to catch a break.

The result of the higher oil prices, Morgan Stanley concludes, will be a continuation of this trend leading to softer-than-expected GDP growth.

“With negative real incomes and tightening credit conditions, we see consumption disappointing through 2018, leaving our 2.0% GDP growth forecast well below consensus at 2.7% and the RBA at 3.0%.”

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