Economics, you’ll find, is full of jargon and fabulous acronyms. ABS, GDP, PPF, IC, AC, KAOS.

(Oh that last one isn’t an economic acronym? Darn. I was so hoping it would be.)

Anyway, allow me to add another one – PEFO! Sounds like an old cleaning fluid, doesn’t it. Well, PEFO is a fancy acronym that really just stands for an economic outlook. This one however is a little different. It’s released by the Treasury and is supposed to be more independent than the Budget. “Supposed to” being the key words because the Treasury is also the same department that crunches the numbers found in the Budget.

Let’s break down their economic outlook. Follow along with the preface as written in the consolidated report released Wednesday. I’ve just used some key highlights here. If you want the full report, click here:

Real GDP is forecast to grow at around its estimated potential rate of
2¾ per cent in 2019-20 and 2020-21, sustaining solid employment growth and supporting a pick-up in wage growth. Household consumption, business investment, public final demand and exports are all expected to contribute to growth.

This first figure is fairly optimistic in my humble judgment, given the contexts we are in. Trade tensions, a (still) very bearish RBA and household savings that are at levels we haven’t seen since 2008 all weigh on the economy. Then again, Australia’s real GDP growth results have had a habit of being wild. A brief look at the last five annual YoY GDP growth results appear to show that Australia has had a pretty wild ride.

The average of the above figures over the time periods given is 2.64%. So in some sense, the figures they are projecting for the next two financial years are in line with the medium run average. The kicker is – the economic contexts this time are different. When the Liberals won their second term in 2016, they were operating from a nice peak at 3.3%. They are going into this campaign 1% lower — and that’s not even considering all the other economic debates going on.

Dwelling investment is expected to detract from growth, following declines in housing prices and building approvals partly in response to a rebalancing of supply and demand.

Domestically, uncertainty about the outlook for the housing market, in particular the extent to which housing prices fall further, poses a downside risk to the outlook for both dwelling investment and consumption.

This is true, no matter where you live apparently. If you look at past RBA minutes (which if you’re not familiar with them, is basically their explanation for why they choose to determine where the interest rate is and what their view is on the economy), there’s been evidence of high dwelling investment for a while. New dwellings kept cropping up in cities and rather than oversupply, their suggestion is that there was enough of a population growth to keep the ratio relatively fair.

(Actual holiday in the US, by the way)

In February’s Statement on Monetary Policy, the RBA did warn that dwelling investment is near its peak. It said that tighter access to credit and less foreign demand has helped fuel to where we are now. When that is tossed in with other factors like drought (country) and the nearing end of short term building approvals (city), this projection seems to make a lot of sense. However, it’s those last three words that the pollies will put a lynchpin on for their campaigns – simply because they are the three words most people understand about economics. (Spoiler: It’s a LOT more than that.)

The economy is expected to continue to benefit from solid global growth, especially amongst Australia’s major trading partners. Global growth strengthened in 2017 and into 2018, with robust labour market conditions driving down unemployment rates in advanced economies. But growth slowed in a number of economies in the second half of 2018. Growth in Australia’s major trading partners has outpaced global growth over the past decade and this is expected to continue.

‘Growth slowed’ are the two key words to look at here. The IMF (which isn’t always right but they’re the most accurate of the predictors) has forecast global growth to fall from 3.6% to 3.3% in 2019. The term they’re using is a “delicate recovery” … where global macro events could mess the world economy up but central banks could dampen the impact through its regular channels.

Now this might not sound terribly interesting to you (especially if you’re not a global economics nerd like me) — but when growth becomes more tepid in the big economies like China and the United States, the whole world feels the effects. Since most of us have investments in the stock market through superannuation, this is the first place it’ll hit you.A

Household consumption growth is expected to pick up over the forecast period, supported by continued growth in employment, increasing wage growth, historically low interest rates and personal income tax measures.

This one, I’ll break down into several key parts. So bear with me:

Consumption is a huge factor that tells the government whether you – the consumer – feel good about your finances (in which case, you’d be spending) or feel concerned about your finances (in which case, you’d be saving).

Considering the RBA has held the interest rate steady for two and a half years straight, this appears to be not a matter of whether there is an incentive to save but rather how you the consumer psychologically feels about your money.

The problem for the incumbent government is when the RBA pairs “weak consumption growth” with “another”. It’s been well and widely reported (and rightly so) that your money is being used less in recent months. Just look at last Christmas’ sales and compare that with previous years, if you needed an example. Income has been “subdued” (in the RBA’s words) for years and its growth has been uncertain for a while now considering ultra low wage growth, (still) falling house prices and savings which continue to be less than auspicious. Fun times for a party that prides itself on winning elections thanks to strong economic management.

Continued wage growth is a problem too, which I’ve written about. The situation we have is illogical (based on the economic models anyway): when interest rates are so low and unemployment is so low, why are Australians so unhappy about the state of their finances? And why aren’t income tax cuts spreading political wildfire like they should?

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And finally: let me just point out two last key points which haven’t been mentioned in the above but were still pointed out by news organisations yesterday. 1) The budget deficit’s forecast this year widened slightly thanks to the Government’s backflip on extending the electricity offset to those on Newstart. and 2) The low and middle income tax offsets supposed to begin on July 1 haven’t passed Parliament yet. That’s kind of a problem as we aren’t in parliament sitting mode. I don’t know how many sitting days there are between inauguration of the next administration and July 1 too … and if it’s too few, then not only would PEFO have to be re-evaluated, a lot of voters will be left very upset.

If you’ve made it to this end of the post, thank you very much. I appreciate your interest in not just broadening your financial literacy but also in taking an interest in the nation’s finances. I’ll be back soon with more early weekend financial reading. Until then, take care and watch your wallet!

(Bonus points if anyone can name the game show host that coined this catchphrase).