Australia government downgrades outlook for economy, budget surplus

Australia's conservative government on Monday cut its outlook for growth in the economy and wages as part of an A$33 billion downgrade to expected revenues over the next four years.

Weak household spending and stagnant wage growth were blamed for the miss, though strong company tax receipts and the falling cost of borrowing provided a timely buffer.

The budget surplus for the fiscal year to June 2020 is now seen at A$5 billion, down from A$7.1 billion previously.

It would still be the first budget surplus in a decade and has been a long-held pledge of the government of Prime Minister Scott Morrison, who won re-election in May partly on the promise.

Morrison has cited the need to achieve a surplus to rebuff calls for a package of fiscal stimulus measures to help revive economic growth, which ran at a disappointing 1.7% in the year to September.

That reluctance has put the onus on the Reserve Bank of Australia (RBA) to stimulate the economy with three cuts in interest rates since June taking them to a record low of 0.75%.

The lack of government action is a major reason markets are pricing in at least more rate cut to 0.5%, and even the chance of unconventional policy such as the RBA buying government bonds.

In his mid-year fiscal outlook, Treasurer Josh Frydenberg projected a surplus of A$6.1 billion for 2020/21, down from A$11 billion previously, while the surplus for 2021/22 was more than halved to A$8.5 billion.

In all, the cumulative surplus out to 2023 was now seen at A$23.5 billion, a drop of more than A$21 billion from the previous projection.

The forecast for gross domestic product (GDP) growth was cut to 2.25% for 2019/20, from an initial 2.75%, though 2020/21 was kept at 2.75%.

There was a steep downgrade to the outlook for wage growth, which has consistently disappointed for several years now. Wages were seen rising just 2.25% this year, down from a projected 2.75%, while 2020/21 was slashed to 2.5% from the government's original 3.25% call.

Unemployment was now seen at 5.25% this year and next, up from 5% previously.

One saving grace has been priced for iron ore, the country's biggest export earner, have topped all expectations thanks to supply disruptions in Brazil and resilient demand in China.

The ore is currently trading around $90 a tonne when the government had forecast an average of $55 for 2019/20.

Frydenberg chose not to lift that forecast, likely hoping it would allow the government to "overachieve" with a bigger surplus in the next full budget in May.