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Australian Budget Crunched by Lockdowns; Hiring Spurt Seen Ahead

Australian Budget Crunched by Lockdowns; Hiring Spurt Seen Ahead

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Australia’s mid-year budget update showed the government’s books hit hard by the cost of an extended lockdown on the nation’s east coast, while predicting a strengthening economy would boost hiring.

The deficit is forecast at A$99.2 billion in the 12 months through mid-2022, slightly down on the May budget’s A$106.6 billion and a median estimate for a A$76 billion shortfall. The jobless rate is forecast to decline to 4.5% by mid-2022 and real GDP is predicted to expand 3.75% this fiscal year.

“The Australian economy is poised for strong growth,” Treasurer Josh Frydenberg said in a statement Thursday. “Income tax cuts and a strong recovery in the labor market is seeing household consumption increase at its fastest pace in more than two decades.”

The government is trying to burnish its credentials as a superior economic manager, having guided the nation through the pandemic, as it bids for a fourth term in an election that needs to be called in under six months. With the economy rebounding from a protracted virus lockdown, stewardship of the recovery is likely to feature prominently in the looming campaign.

Higher commodity prices helped cushion the budget blow from protracted lockdowns in New South Wales and Victoria, the nation’s two most populous states that account for more than half of national output.

The Reserve Bank of Australia will welcome the expected decline in unemployment as it tries to spark faster wages growth and return inflation to its 2-3% target. The bank expects it to take about two more years for those conditions to be in place, clearing the way for interest-rate liftoff.

Markets are more optimistic, predicting the RBA will begin its tightening cycle around mid-next year.

The new omicron variant of coronavirus could potentially cloud the outlook, though, with the latest readings of consumer and business sentiment signaling households and firms turning more cautious. 

Today’s mid-year economic and fiscal outlook showed:

  • Real GDP is forecast to be to 3.75% in 2021-22 before slowing to a still healthy 3.5% in 2022-23
  • Unemployment is seen falling to 4.5% in June 2022, then to 4.25% in June 2023 and holding around that level thereafter
  • Net debt is expected to be 30.6% of GDP at June 30, 2022 and projected to peak at 37.4% at June 30, 2025
  • Iron ore price assumed to decline to $55 per ton FOB by the end of June 2022
  • The wage price index is forecast to rise to 2.25% in mid-2022, 2.75% in mid-2023 and 3% in fiscal 2024
  • A gradual return of temporary and permanent migrants is also assumed from early 2022

©2021 Bloomberg L.P.