Bonanza Day: Pulling out all stops to avoid recession

Federal Government stimulus package

  • The Federal Government has unveiled a $42 billion stimulus package (3.5 per cent of GDP) and new economic and Budget forecasts. The combination of massive monetary and fiscal stimulus should be enough to keep the economy out of recession.

  • The budget is expected to move into deficit of $22.5 billion (1.9 per cent of GDP) over 2008/09. The previous forecast was a $5.4 billion surplus. The economy is tipped to grow 1.0 per cent this year and 0.75 per cent in 2009/10.

  • The jobless rate is seen at 5.50 per cent in the June quarter and 7.0 per cent in June quarter 2010.

What does it all mean?

  • February 3 2009 may go down in history as “Bonanza Day”. Not only did the government hand down a massive stimulus plan of almost 4 per cent of GDP but the Reserve Bank slashed interest rates to 45-year lows.

  • This should be enough to keep the economy out of recession. The combination of significant rate cuts, handouts to low income earners and targeted infrastructure will keep the economy growing over the next year, albeit at a more modest pace in recent years.
  • We have no problems with the budget going into deficit. Australia built up a war chest of funds in the good times and now it should be used to protect us in the tough times.

  • The timing of the government handouts is quite smart. The handout to families in December should mean that household spending and overall GDP grew in the December quarter. Similarly the new government handout in April will boost the June quarter GDP result. For the economy to fall into recession would require that the majority of families save, rather than spend, their special payments, or for a lot to go wrong elsewhere in the economy.

  • Some Australians will be doing very, very well from the government’s new stimulus package and generational low interest rates. We estimate on the basis of interest rate cuts alone that average wage earners have been effectively awarded a pay rise of around 15 per cent since September last year.

  • While home buyers are key winners from Government and Reserve Bank stimulus efforts, renters and self-funded retirees have little to show from all the dollars being splashed around.

  • The building trades certainly are key beneficiaries from the latest stimulus package. New public housing, infrastructure spending at schools, solar water rebates and free roof insulation will lead to a substantial boost in building activity and spending. Importantly the new stimulus measures are on top of the money provided to councils for building projects and the expanded first home owners grant.

  • If you are after a builder or tradesperson in the next year, it may prove to be a case of ‘take a number and wait.’ Builders are going to be run off their feet getting all the projects to be completed.

  • Small and medium businesses are key winners from the stimulus plan. The raft of building work will lead to multiplier benefits across the economy. Similarly the government handouts will boost the coffers of a raft of businesses. And the $2.7 billion tax break will benefit a range of Australian manufacturers as well as flowing offshore to equipment suppliers.

  • The economic forecasts for 2008/09 are very similar to our own forecasts, so we have few problems with the estimates. But the early numbers for 2009/10 look overly gloomy. It may be the case that Treasury is under-promising for 2009/10 so it is in the position to over-deliver. In political terms, the Government would have few problems with that strategy.

What do the figures show?

  • The Government has announced a “Nation Building and Jobs Plan”. The stimulus plan is valued at $42 billion, is targeted at small business, the building industry and lower income families. The plan aims to create 90,000 jobs over the next two years.

  • Australian Associated Press has reported the main details of the stimulus plan as:
    • “$14.7 billion to be invested in school infrastructure and maintenance and bringing forward funding for trade training centres;
    • $6.6 billion to increase the national stock of public and community housing by about 20,000 new homes;
    • $3.9 billion to provide free insulation to 2.7 million homes and solar hot water rebates;
    • $890 million to fix regional roads and blackspots, to install railway boom gates and for regional and local government infrastructure;
    • $2.7 billion small and general business tax break to provide deductions for some equipment purchases before the end of June 2009;
    • $12.7 billion for immediate one-off payments to working Australians, families with school-age children, farmers, single income families and for those undergoing training.”
    • It is estimated that 8.7 million workers will receive a lump sum of $950 from April. An estimated 21,500 farmers get the payment from March 24. About 1.5 million single-income families receive the payment in the fortnight beginning March 11.

  • The Government now expects the Federal Budget to be in deficit until at least 2011/12. A deficit of $22.5 billion (1.9 per cent of GDP) is forecast for 2008/09 (previous estimate was a surplus of $5.4 billion)

  • The economy is expected to grow by 1.0 per cent in 2008/09 and by 0.75 per cent in 2009/10.
    The unemployment rate is tipped to reach 5.5 per cent in the June quarter 2009 and 7.0 per cent in June quarter 2010.

  • An inflation rate of 2.0 per cent is expected for both this year and next year.

  • Business investment is tipped to rise 0.5 per cent this year but plunge 15.5 per cent next financial year. But public spending is forecast to rise by 5.5 per cent this year and 7.25 per cent in 2009/10.

What are the implications for interest rates and investors?

  • The combination of substantial fiscal and monetary policy measures reduces the need for further stimulus in coming months. CommSec is factoring in another 50-75 basis points of rate cuts in the next few months if a further boost to the economy becomes necessary.

  • Building material suppliers, retailers and a raft of small businesses are key winners from the stimulus package. Small businesses are major employers, so any attempt to support small business will support household spending.

  • The main criticism is that the Infrastructure Australia projects are still tangled in red tape – the priority projects won’t be nominated until March. Work on these key projects should be underway now.

  • While we believe that the tax cuts should also have been brought forward, we can understand the political realities of leaving them to commence in July. The tax cuts will boost spending in the September quarter, again reducing the chance of a recession.

Source Craig James, Chief Equities Economist, CommSec