The Wrap: Economy; Wealth, IMF And Imaging

Weekly Reports | May 17 2019

Weekly Broker Wrap: consumer tax lift; RBA and Oz economy; wealth platforms; infant milk formula; diagnostic imaging; and supermarkets.

-Consumer spending may be lifted from July as tax rebates take effect
-Slowing employment growth the key to an RBA decision on cash rates in the second of 2019
-Change to franking credit policy could be positive for Australian wealth management platforms
-Sales of infant milk formula in China decelerating as births slow
-Healthy outlook for the diagnostic imaging segment
-Improving inflation outlook underpinning supermarket sector


By Eva Brocklehurst

Consumer Tax Lift

Tax relief in the 2019/20 federal budget should provide a de-facto tax cut to around 10m Australian residents and inject a significant amount of cash into the household sector from mid July, Commonwealth Bank economists assess. This will occur regardless of the outcome of May 18 election, as the ALP opposition has backed the government's policy.

In many ways, the economists suggest this is akin to the $900 “cash splash" per person delivered from the government during the GFC in 2009. The CBA economists believe 2009 provides a guide as to how households may spend this rebate from the 2019 budget.

Evidence shows there was a clear, short term positive impact on spending and there could be a material bounce in retail trade for a 3-4 month period. In total, the Australian household sector will receive around $7.25bn in rebates over 2019/20 and a similar amount will be refunded in 2020/21.

RBA And Oz Economy

Franklin Templeton finds it interesting that, despite downward revisions to the RBA's growth and inflation forecasts, cash rates were left unchanged at 1.5% at the latest board meeting.

The analysts consider the RBA's downgrade to both growth and inflation was the largest possible without contradicting the interest-rate decision a few days prior, and now hangs on the outlook for the labour market.

Franklin Templeton focuses on employment by groups of industries to reflect the major components of demand such as consumer and business spending, government expenditure and exports. The analysis points to employment exposed to private consumption slowing sharply, while business and government-exposed employment is growing at a better rate.

Exports-exposed employment has been mixed. This is the smallest category because of the capital-intensive nature of these industries. Employment in business spending-exposed groups also tends to lag employment in consumer-exposed group by around 12 months.

The analysis implies a slowdown in overall employment growth is likely to begin in the June quarter and become more pronounced throughout the remainder of 2019. Amid falling house prices and near-zero real income growth, a rebound in consumer-related expenditure appears unlikely, absent a boost to disposable income via lower interest rates.

Unemployment, therefore, is expected to rise the second half of 2019. Even growth in government employment is unlikely to offset this. If this occurs, Franklin Templeton considers the RBA will have no choice but to reduce the official interest rates and the only question would be by how much.

Australian Wealth Platforms

Citi suspects a change to franking credit policy could be positive for Australian wealth management platforms. The proposal by Labor could be positive for Netwealth (NWL)) and HUB24 ((HUB)) as it could result in incremental flows from off-platform self managed super funds (SMSFs).

However, whether this eventuates is not certain as the amount of flows into each platform depends on the mix of accumulation and pension members. Other strategies could also be adopted to minimise the impact of any change.

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