The big banks are not the only ones getting bullish about the outlook for Australia’s economic recovery.
Photo: Alex Ellinghausen There’s a reason the Reserve Bank is now expecting gross domestic product to grow at an annualised rate of 3.6 per cent this year.
But it’s not just the big three banks that are expecting growth.
A key concern for investors is the extent to which the Reserve will remain tight in terms of policy in the short term.
There are three key things that are driving investor sentiment right now:The Fed has taken some aggressive action to boost growth and inflation, while the Bank of Australia is keeping the interest rate at 2 per cent.
The Reserve has been able to buy up large quantities of Treasury bonds, which is pushing down interest rates further.
This, combined with a softening outlook for the economy from the Reserve, has fuelled the enthusiasm for the Federal Government to act.
There’s also the prospect of a weaker Australian dollar, with the Australian dollar hitting an all-time low against the US dollar on Tuesday.
The dollar is expected to strengthen against the euro on Wednesday.
The big three are all taking different views on what is causing the economic growth slowdown in Australia.
The Federal Government has not responded to questions about the latest outlook, but the Federal Treasurer, Scott Morrison, has indicated that the Reserve could act as a buffer if necessary.
But the key question is whether the Fed will continue to be tight.
Ahead of Tuesday’s rate announcement, the US Federal Reserve chief Janet Yellen had said that the central bank would keep interest rates near zero “until inflation is at or near its 2 per.cent target”.
Ms Yellen said the US was “not at a point yet where it’s ready to raise rates at that level”.
But she also said the Fed’s monetary policy was not a “silver bullet”.
“The real question is how much does the Fed get to do with this,” she said.
“Is it a stimulant?
Or is it a catalyst?
And I think it’s a catalyst.
And it’s important to note that this is not a silver bullet.”
She added that monetary policy should not be seen as the sole source of the US recovery.
“The economy does not work well on the back of monetary policy.
The Fed’s policy is not the primary driver,” Ms Yellen told the Financial Review.
The US Federal Budget Office released an estimate that a $US100-a-tonne drop in the dollar would add $US400 billion ($1.2 trillion) to the budget deficit this year, which would be “a very big problem for the government”.
The budget deficit is currently forecast to rise to $US1.3 trillion in 2019-20.
It was not clear whether that would mean a return to full employment, but it is a significant increase.
“This is not an optimistic forecast,” Mr Morrison said.
But he added that the economy would be able to return to growth if the economy was “stable and sustainable”.
And he said that if the Federal Budget came in at “some kind of surplus” in 2019, the Government would be confident the economy could recover.
The Australian dollar has dropped against the dollar in recent days following the Fed announcement, with trading down about 8 per cent since Tuesday morning.