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Implications for investments

 

The rapid coordinated fiscal and monetary policy response by the Australian Government, as well as its pandemic containment policies have led to materially better economic growth and lower unemployment than expected during the previous budget in October. While there have been setbacks in vaccine rollout, we are looking at a period of falling unemployment, rising consumer confidence, commodity and asset prices and further economic normalisation. The Australian economy is growing at its fastest rate since the ABS started measuring data in the 1960s.

 

The budget is balancing short-term issues with longer term megatrends, such as biosecurity, defence, digital technology and energy, while also considering aged care, natural disasters and deregulation and recognises the private sector will need to take over at some future point as government spending winds down. From an investment perspective, the benefits will be very sector specific. 

 

Australian Federal Budget

Mercer’s Perspective

 

Australia is at a crossroads. Recent economic data indicates Australia, and indeed most of the developed world is performing well, helping to alleviate budgetary pressures of the massive fiscal responses to COVID-related government-imposed restrictions. While we remain cautiously optimistic, the recovery from the pandemic is irregular as the situation in India highlights. At the same time there are growing tensions with China.
 

Short term priorities for the Australian government are essentially rolling out the vaccine, getting people back to work, and lives back to normal. However, the world is transforming at an unprecedented rate, and to an unparalleled extent. This represents a period of great risk and opportunity for investors.[1] It is therefore important for longer term investors such as super funds to integrate the unusual current economic and trading conditions with underlying global megatrends into their decision making processes.
 

Australia’s government has the capacity to tackle some of these megatrends as its debt level – while high in an historical context – nonetheless ranks favourably against other developed nations. Australia has a triple-A sovereign rating and in addition, there is no doubt that the RBA policies at the moment are supporting the serviceability of debt in Australia. The RBA introduced Quantitative Easing in November 2020 and in the long term looks set to reach both its 2-3% inflation and below 5% unemployment targets as inflation and labour markets are expected to strengthen beyond 2021. Mercer expects monetary and fiscal policy settings to remain accommodative over the next few years.
 

The policies announced at the budget may be less stimulative than before, but will help us keep grinding ahead. From all of the above perspectives, the budget should be received favourably by financial markets and indeed with much of the budget leaked, the market has already rallied ahead of the event. Going forward we expect the Australian share market to continue to be dominated by global conditions including the strength of the global economy, the trajectory for US monetary policy, progress of the global pandemic and geopolitics. For Australia, investor focus for 2021 domestically will continue to remain on property prices, labour markets and the potential impact of inflation on interest rates.

 

[1] http://www3.weforum.org/docs/WEF_Phase_II_of_the_Transformational_Investment_2021.pdf

 

 

 

 

 

 

This content is intended to inform clients of Mercer’s views on particular issues. It is not intended to be provided to any person as a retail client and should not be relied upon or used as a substitute for professional advice specific to a client’s individual circumstances. Whilst Mercer believes the prospective information and forward looking statements made by Mercer in this report are based on reasonable grounds, they are predictive in character and may therefore be affected by inaccurate assumptions or by known or unknown risks and uncertainties. This content has been prepared by Mercer Consulting (Australia) Pty Ltd (MCAPL) ABN 55 153 168 140, Australian Financial Services Licence #411770. Any advice contained in this content is of a general nature only and does not take into account the personal needs and circumstances of any particular individual. Prior to acting on any information contained in this content you need to take into account your own financial circumstances, consider the Product Disclosure Statement for any product you are considering and seek advice from a licensed, or appropriately authorised financial adviser if you are unsure of what action to take. ‘MERCER’ is a registered trademark of Mercer (Australia) Pty Ltd ABN 32 005 315 917.

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