According to the government's Mid-Year Economic and Fiscal Outlook (MYEFO) released yesterday, in the 2014-15 financial year we can expect a $40.4 billion deficit!
That's approximately $1,703 for every man, woman and child.
Talk about downward revisions…
It wasn't that long ago, in fact November 2012 to be exact, when the prospective treasurer, Joe Hockey, said the Coalition would generate, "a surplus in our first year in office and we will achieve a surplus for every year of our first term".
This compares with his forecast yesterday of a return to surplus in 2019-20.
However, I should note that the price of iron ore – our most lucrative commodity – has tanked. Coal prices have also followed suit.
The new normal
After around 23 years of a recession-less Australia, we've become used to a robust economy. Fuelled by both a 'once-in-a-century' mining boom and the subsequent rally of house prices, our wallets have been lined with overseas cash seeking exposure to what has truly been, "the lucky country".
Unfortunately with mining investment slowing dramatically, Australia's economy is feeling the pain. GDP growth is expected to come in at 2.5% this year and next.
And despite the RBA's best intentions, the non-mining sector isn't picking up the slack. But with unemployment tipped to increase to 6.5% next year, who can blame businesses and consumers for keeping their hands in their pockets to maintain a healthy cash balance.
MYEFO noted: "The household saving ratio has remained high relative to the period immediately before the global financial crisis… There is a risk of weaker consumption spending should households continue to save at current levels."
What it means to share market investors
Obviously, steering clear of mining services businesses and iron ore stocks like Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) is probably a good idea in today's market.
But the record earnings of Australia's biggest banks, such as Westpac Banking Corp (ASX: WBC), could also come under pressure. If confidence continues to falter, house prices slow and unemployment rises substantially, their lofty valuations could come under threat.
It's also worth noting the government's forecasts use a world oil price (Malaysian Tapis) of $US118 per barrel. In recent times, oil prices have plummeted. The share prices of Australia's biggest and best producers such as Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO) have followed it down.
Foolish takeaway
As Foolish (capital 'f') investors, we do not allow macro news to dictate our investment decisions. But all shareholders should be in the business of looking to the future. Indeed it is important to take note of the likely trends in our economy and understand how they will affect our portfolios' performance over time.
Australia has enjoyed many years of robust GDP growth and relatively low unemployment levels. However the medium-term outlook for the local economy is patchy, to say the least. Whilst volatility in the market could bring opportunity, readers would be wise to consider the risks of every investment and remember if something is too good to be true, it generally is.
