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Andrew Hanlan senior economist at Westpac. It's certainly been a very eventful week
and it promises to be another eventful week for the Australian economy
and the Australian markets. The most recent update on Australian inflation, the Q1 CPR came
in well below expectations of a certainly headline catching number
the headline figure saw prices fall 0.2 percent in the March quarter
the annual rate slowed to 1.3 percent and importantly core inflation or underlying
inflation rose just 0.2% in the March quarter. That was enough to see annual
inflation or annual core inflation slow from 2% to 1.5%. Importantly
that's well below the Reserve Bank's band of 2% to 3% on average over
the cycle. The markets have reacted and is now priced 50/50 that the Reserve
Bank will lower interest rates when they meet on Tuesday the 3rd of May.
Westpac economics still expects the Reserve Bank to remain on hold. The Reserve Bank has
indicated that low inflation provides the scope to ease policy, should that be
appropriate lend support to demand. We still think that the balance
of evidence suggests that the economy performing reasonably well despite the
softer CPI number. The business surveys, the labor market numbers all suggesting
the Reserve Bank will probably hold on to its forecast of economic growth of
3% for 2016/2017. A pace that's a little bit above trend which suggests inflation
pressures will start to increase as we go forward
the inflation will move back into the band by 2017.
Turning now to the Federal budget which will be released on the same day May 3,
we expect to see some improvements in terms of the budget figures. What we're
seeing is for 2015/16, the mid year forecast
was for a deficit of thirty-seven billion dollars. The indication is that despite weaker
revenue in terms of company tax and
individual collections, what we are seeing is lower outlay so the figure for 2015 /2016 is still on track
and could actually come in being less than projected. Going forward what we're
seeing is that for 2016, 2017 we expect to see an upgrade of the economic growth
forecast so the real economy has been performing better than expected,
commodity prices have bounced in 2016, that should see an upgrade to the iron ore price
and upgrade to the terms for trade, and upgrade to nominal GDP growth and that will flow
through the bottom line for the budget. In terms of the key things in the budget
the Prime Minister has indicated the key things will be around investment and
infrastructure. We expect to see some tax measures encouraging investment by
the small business sector as occurred in the May 2015 budget. We also expect to
see announcement of a new infrastructure body which will be encouraging investment in
infrastructure projects that could cover or some funding including for the private
sector. In terms of the funding of new measures, all new measures in terms of
taxation will be offset by other tax measures which will be integrity measures
such as high taxes in relation to think capitalization rules, in relation to
superannuation, relation to taxation of cigarettes in terms of expenditures the
government indicated it all new measures will be fully funded. So certainly next
Tuesday the Reserve Bank and Federal budget will be the key focus for markets later in the week
we'll also get an updateson retail sales and trade balance. Thank you.