I’ve seen 49 budgets, and Chalmers’ one is quite unique: Robert Gottliebsen
Both Australia and the US face at least two years of widely differing performances by listed enterprises. Accordingly, it will be the skilled stock pickers that do best in what will be an unprecedented era.
After the 2023 budget lockup for journalists, I did a recount of the number of past lockups I have attended, and I reached 49 – the first one was the 1974 budget delivered by the late Frank Crean.
The 2023 budget was unique for me in two ways. First, back on February 2 the iron ore and gas prices enabled me to probably be the first commentator to forecast a budget surplus.
Second, in all those years I can’t recall a treasurer forecasting that inflation would slump from 6 per cent to 3.25 per cent in one year while wages grew by 4 per cent and real GDP growth would fall from 3.25 per cent to 1.5 per cent.
It’s such an outlandish forecast that there is a good chance it’s wrong but, to be fair, it is not that different to the forecasts of Australia’s largest bank (via economist Gareth Aird) which anticipates big falls and interest rates in the half year to December 31 as the Reserve Bank reacts to the sharply declining economy and inflation rate.
But given the big spending of the government, I believe the balance of probability is that inflation will not fall as expected in the budget and there is risk that a shocked Reserve Bank will not cut rates and may even be forced to raise them. The blame will sit squarely on government spending.
If interest rates don’t fall as anticipated, or even rise, consumer spending will be restrained and some of the government projections will be disrupted. It may be forced to raise taxes. Higher income and asset rich people, watch out.
For the moment, let’s assume Treasurer Jim Chalmers is right.
Many enterprises will have to manage rising wages and falling prices at a time of sharply reducing growth.
Those that have pricing power and/or low wage costs will see their shares do very well given the falling interest rates, but there will be many casualties.
Accordingly, it will be the skilled stock pickers that do best in what will be an unprecedented era.
Mining companies should do well given the growth Chalmers expects in China, but in the Treasurer’s view China will be an isolated high-growth “island” in a sea of lower world growth led by the US where growth is only expected to be around 1 per cent. Japan falls below 1 per cent.
The world is decarbonising and Australia has the opportunity to be a major supplier of rare earths, copper, nickel and lithium. This will require enormous investment, but the budget documents only forecast minor growth in our mining investment and the big investments being undertaken in power transmission and generation passed the budget by.
It may be that the investment will come in subsequent years, but it will arrive, and when combined with defence expenditure, it’s hard to see inflation in Australia slumping so rapidly.
Given the clear possibility the budget forecasts are wrong, corporations must also manage for the possibility that inflation stays well above 4 per cent, which will make it very difficult to reduce interest rates. And if inflation is too sticky, rates will have to rise.
Because of the magnitude of the inflationary fall that is being forecast and the fact that this is the month that bigger cash outlays by those under mortgage stress gathers pace (as they move from low fixed-rate mortgages to much higher current interest rates), there should be signs in the next few months of falling inflation and economic activity.
Similarly, in the US, inflation reduction along with a declining economy must start to gather pace in coming months if the Chalmers’ predictions are to be right
The rampant bears in the stockmarket are forecasting that coming out of this turmoil will follow a long period of global economic weakness, probably linked to a credit crunch.
Those predictions are not that different to those being made by the veteran US investor Warren Buffett, who is warning his supporters that we are entering into a world where credit is much more restricted.
In the US, many companies will find themselves overstocked because they expected a continuation of high activity.
That might also happen in Australia, although our unique housing crunch with its builder failures and community mortgage stress has provided an alert to Australian enterprises which will help them avoid what Buffett believes will take place in the US.
The Buffett scenario raises the possibility that we face a long period of 1970s type inflation/low growth, which is termed “stagflation”.
The head of the Snowy Hydro, Dennis Barnes, has warned that Australia is simply not going to achieve its decarbonisation goals and the politicians have not grasped the implications.
And the mining companies at least in Australia may not be moving fast enough to supply the huge increase in essential metals that are required as part of the decarbonisation.