Slowing growth: Kohler

The Government now has a lower inflation forecast than the Reserve Bank – 3.25 per cent for the year to June 2009 versus 3.5 per cent for the same period in last week’s Monetary Policy Statement from the RBA.

Not a big difference, perhaps, but enough to allow Ministers off the leash to argue against further rate increases.

In some ways this was the whole point of today’s budget – to allow Treasury to produce a lower inflation forecast than the RBA, which reinforces the Government’s claim to be supporting the fight against inflation and to come out on the side of the battlers with mortgages as the year goes on.

Apart from that there is little that’s remarkable about the budget as an economic document. GDP is forecast to grow 2.75 per cent in 2008-09, which is a big reduction from the 3.5 per cent forecast in the pre-election economic and fiscal outlook published during the election campaign last year.

But that’s an appropriately conservative growth forecast given the sharp slowdown we are already seeing in business and consumer surveys, as well as indicators like housing finance and retail sales.

Despite that, the risks to the Government’s outlook are clearly to the downside. It is still forecasting 4 per cent global GDP growth, which will require continuing strong growth in China and India.

Moreover the Government is still forecasting household consumption to growth by 2.75 per cent in 2008-09. That’s down from 4.5 per cent in the current financial year, but could end up looking optimistic.

Contributing to further declines in household consumption next financial year could be the efforts to rebuild the national household balance sheets.

In a special box in Statement no.2, Treasury predicts that the savings ratio will rise in 2008-09, continuing the recent reversal of its 30-year decline.

The turnaround is probably due to the increase in incomes brought about by the terms of trade boom, coupled with the growing perception that it might be temporary – especially since the credit crisis broke. In addition to that, as Treasury points out “households have become much more indebted”, so they are more likely to try to protect themselves by getting debt down now.

The only other surprise in the Government’s forecasts is 16 per cent terms of trade growth predicted for 2008-09, up from 4.75 per cent growth in 2008-08. The terms of trade is the difference between export prices and import prices.

That is a stunning increase for a supposedly conservative Treasury Department, considering most market economists are talking about 13-14 per cent.

According to Treasury, the terms of trade will increase by more than 20 per cent over calendar year 2008, which would be the largest increase in a generation.

This was first published on Business Spectator.