In notes to their clients, here is how some of Australia’s major banks and others are talking about the Rudd Government’s economic security strategy.

The National Australia Bank welcomed the package saying it was “both targeted and timely — as domestic economic activity is set to slow significantly during 2008/09”:

Nab estimates that this will boost spending and in turn overall GDP by around 0.5% in 2008/09. The current spending initiatives — for low income families and pensioners — should provide a significant boost to household consumption by over 1% around the end of 2008 and in the first half of 2009 — given that the majority is likely to be spent.

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Together with our forecast sizeable cuts in the cash rate by the RBA by early next year, the first home buyers grant is likely to be taken advantage of and in turn provide a small boost to new dwelling investment during 2008/09.

That said, this package together with further infrastructure initiatives ahead were anticipated in our latest economic and financial forecasts released earlier today. Our forecasts assume that “real” public spending picks up to 5% in 2008/09 — allowing for some further initiatives as well as spending of “Future Funds”.

As a result of fiscal stimulus and the cyclical effects of slower growth etc, we estimate the Commonwealth fiscal position will move to a surplus of about $7bn in 2008/09 and into a small deficit of say $10bn in 2009/10.

AMP Capital Investors Chief Economist, Shane Oliver: This is the sort of thing we need. The increase in the pension will have direct impact because pensioners are already pretty strapped. Any increase will be spent quickly. I’m less sure about the $1000 payment to lower to middle income families. They might save it, especially if worries about unemployment and mortgage debt are playing on their minds. There’s also a risk with the increase in the First Home Grant. But overall it’s a move in the right direction, though it’s probably not enough. It provides a buffer, but it won’t be enough to stop a recession. I’d now put the odds of a recession at 50/50. The storm clouds are gradually blowing towards Australia.

ANZ Senior Economist, Mark Rodrigues: The measures have, by and large, been constructed to get the maximum economic impact for the dollars spent by directing them to people who are likely to spend them, in the quarter when the negative effects of the financial crisis are likely to be greatest. The package is equivalent to 0.9% of nominal GDP, though given the multiplier effects the spending is intended to induce, the overall stimulus could end up being larger than this if most of the payments are spent.

By our figuring, the deterioration in economic outlook (including for commodity prices) since May has reduced our estimate of nominal GDP growth to 6¼% in 2008-09, some 3ppts less than the government’s Budget time forecast. This suggests that before any discretionary policy interventions are taken into account, the Budget forecast for a cash surplus of $21.7bn in 2008-09 would be reduced by up to $14.4bn to just $7.3bn in 2008-09. Admittedly, this is an upper bound estimate of the overall fiscal impact of the deteriorating economic environment, but it does suggest that once the $10.4bn stimulus package is taken into account, the budget will be very close to balance in 2008-09, with the potential for a movement into deficit.

CommSec Chief Equities Economist, Craig James: We certainly welcome the Government’s move to boost housing construction. Australia’s population is growing at the fastest rate in almost 20 years but construction hasn’t been keeping pace. The incentives for first home buyers to build new homes or buy newly erected homes represents a major and much-needed boost for house construction. The spending package is not without its risks. It may turn out that the economy is fundamentally better shape than currently assumed. But in an environment where many advanced economies are in or near recession, we believe that it is a risk worth taking. The one-off payments will make life a little easier for pensioners and low income earners, rather than unduly boosting household spending across the country.

If advanced economies quickly recover and the stimulus package proves overly successful in supporting our economy, then the Reserve Bank may show greater constraint in cutting rates. Only time will tell. We still expect the Reserve Bank to slice the cash rate to 5 per cent in coming months. Overall, we believe that the Government could have waited a little longer before deciding on the one-off payments to pensioners and low income earners. But the grants for first home earners are widely supported. The only complaint being that the Government took so long to act on the housing crisis.

ICAP Australia Senior Economist, Adam Carr: It’s worth considering the Australian government’s moves yesterday as well. This has some pretty serious implications for the very aggressive easing cycle priced by the market. The plan to spend $10.4bn to boost economy should add just under 1.0% to GDP in the current 2008/09 fiscal year. On a direct feed that should leave a surplus of under $11bn or around 1.0% of GDP from the projected 1.8%. The market is currently pricing in 100% chance of a 4.75% cash rate by year end and a 2/3 chance of 4.50%. That’s an additional 150bp in cuts. The problem though is that the government spend is probably equivalent to a few rate cuts and so would have to make it less likely – much less likely that the RBA will cut aggressively from here – I’m sticking to 50bp in November, but then I reckon they’ll leave it there after that at 5.5%. Again nothing is set in stone and that 50bp cut call is predicated on interbank lending rates remaining high – as they ease, so too the prospects of a 50bp cut and vice versa.

Goldman Sachs JBWere: … [T]he First Home Owners package does have the potential to bring forward new housing construction demand. Though much of it will merely be capitalised into established house prices, it could hasten the appetite for new construction amid the more important catalyst of past and expected interest rate cuts by the RBA. We expect the RBA to cut rates to 4.5% by end 1Q09, resulting in a 30% lift in housing affordability. This will translate into a meaningful boost to new housing demand through 2H09.

Government Budget estimates: It is difficult to argue with the Government’s assertion that the Budget will still be in surplus after these measures. $9.65bn of the total $10.44bn spending initiative occurs in the current 2008-09 financial year. Taken against the $21.7bn surplus projected in May, this leaves $12.1bn (1% of GDP) prior to adjustments for parameter variations (i.e. changing economic circumstances).

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Peter Fray
Peter Fray
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