With the Australian Government yesterday releasing its mid-year budget and economic update, AREEA’s principal adviser – industry and economic policy, Tristan Menalda, provides this update on the health of the economy.

The Australian Government this week released its Mid-Year Economic and Fiscal Outlook (MYEFO), showing a softening of key economic and fiscal indicators which may have implications for AREEA members involved in bargaining or tendering for future major project contracts.

In what would be unsurprising for many AREEA members, the MYEFO report tells us that the economy is softening and remains extremely volatile.

It also demonstrates that the national economy is not transitioning away from its heavy reliance on mining investment, and thus stimulating economic activity in non-mining areas, as fast as the government has hoped.

A summary of key points is as follows.

Wages and inflation:

Both the wage price index (WPI) and the consumer price index (CPI) forecasts for 2016/2017 and 2017/2018 were downgraded by a quarter of one per cent (0.25%).

This means that if the forecasts are correct, in 2016-17 and 2017-18, wages growth (WPI) will exceed inflation (CPI).

However, it is important for AREEA members to remember that these are the all-industry numbers for the entire nation.  Recent AREEA analysis (slide three here) on specific mining wage price inflation shows mining inflation is growing between .5% – 2% below the national all-industry average.

Therefore even though mining salaries are still the highest in the country, growth in percentage terms should be below the all industries average.

GDP:

GDP growth for the next four years is forecast to range between 2% to 3%.  However, the potential of any significant retreat in commodity prices, particularly iron ore and coal, presents a very real risk to government forecasts and national accounts.

National debt and budget repair:

Nationally, net debt is forecast to rise from $317bn in 2016-17 to $364bn in 2019-20.

This is not a good sign and may raise concerns among the international credit agencies that could see Australia’s AAA credit rating fall to AA.

The resulting fall in the Australia dollar may perversely benefit the resource industry by creating a natural foreign exchange hedge for our commodity exports (largely traded in US Dollars), and through making Australia a comparatively cheaper destination for foreign investment.

Nonetheless, a loss of our AAA credit rating would be a significant blow for our nation generally, and AREEA will publicly advocate for measures to retain our AAA credit rating due to the wider benefits that would be achieved.

On a final note about budgetary repair, the MYEFO reaffirms the government’s commitment to returning the budget to surplus, which it remains forecast to achieve by 2020/21.

Modest surpluses are projected over the remainder of the medium term. A surplus of 0.4 per cent of GDP is projected in 2026-27, up from 0.2 per cent at the 2016 PEFO.

For any queries on the Mid-Year Economic and Fiscal Outlook (MYEFO) and what it means for Australian resource employers, contact [email protected]