Australia's economic landscape is a vast and intricate web, influenced not only by domestic policies but also by international occurrences. Over the years, fiscal, monetary, and international factors have played crucial roles in shaping the nation's economic health, and understanding their impact is essential.
So, let’s explore how fiscal and monetary policy impact the markets for investors.
Fiscal policy – shaping the macroeconomic landscape
Fiscal policy is set by the federal government. This policy toolkit includes decisions on taxation and government spending and its effects have substantial consequences for the markets.
So, how does changing fiscal policy impact the financial markets? A loose or ‘expansionary’ fiscal policy—often marked by tax cuts and increased government spending—injects additional funds into the hands of individuals and businesses. This boost in disposable income prompts increased consumer spending and business investment, which, in turn, stimulates stock markets.
A recent example of this would be the JobKeeper and JobSeeker payments introduced in 2020—with both wage subsidy and income support programs introduced to stimulate the economy at a time of high unemployment.
Conversely, tighter fiscal policy (also known as contractional fiscal policy) typically introduces tax hikes and budget cuts, constraining spending and cooling off stock market enthusiasm. The most notable policy of this nature that is still in effect today is the Goods and Services Tax (GST), introduced in 2000. The implementation of the GST reduced consumer spending due to the 10% tax levy on most goods and services, causing ripples in the market.
In a nutshell, fiscal policy is like the steering wheel of the economy; just as a driver turns the wheel to steer the car, fiscal policy allows the government to guide economic direction.
Monetary policy – a careful balancing act
If fiscal policy represents the steering wheel, then monetary policy is effectively the accelerator and brake pedals.
The Reserve Bank of Australia (RBA) is the custodian of monetary policy, primarily focused on influencing interest rates. This essential instrument aims to balance inflation and employment, and its impacts on the markets are distinctive. By raising or lowering interest rates, the RBA can control the supply of money in the economy, therefore speeding up or slowing down economic activity.
Like fiscal policy, loose monetary policy—characterised by low-interest rates—provides individuals with more disposable income. With extra cash at hand, consumers may increase their spending, fuelling stock market rallies.
Again, tighter monetary policy—typically in the form of higher interest rates—raises the cost of borrowing and can lead to reduced consumer spending and business investment as they focus on servicing debt. This could mean less profit, or reduced dividends, which would adversely affect the stock both for the business itself and its investors.
The RBA's recent focus has predominantly revolved around adjusting interest rates to manage inflation and employment. The market closely tracks the RBA's interest rate decisions, making them a focal point for investors and traders.
Staying on top of policy changes
By now, it might become apparent that a car—the economy—can only operate effectively with both direction and careful adjustments in acceleration. To effectively navigate the Australian markets, investors must pay close attention to shifts in both fiscal and monetary policies. This is important as no investment is immune to the effects both policies have on the markets.
Fiscal policy changes are typically unveiled during the Federal Budget each year in May and may necessitate swift investment strategy adjustments. Keep in mind that some changes to fiscal policy do not happen right away and may be flagged to change over time as well. The devil, as always, is in the detail.
On the other hand, monetary policy changes, especially related to interest rates, are announced by the RBA at its Minutes of the Monetary Policy Meeting of the Board on the first Tuesday of every month, except for January. It’s important to note that from 2024, the Board will only meet eight months out of the year, down from 11.
International factors to consider
Beyond fiscal and monetary policies, international factors play a crucial role in shaping the investment landscape—these factors can influence domestic policies too. Some examples of this include geopolitical events, global economic trends, trade relations, exchange rates, global supply chains, and black swan events—such as war and health crises.
Trade relations are particularly pertinent to the Australian markets, given our economy is so reliant on trade and exports. International trade agreements, disputes, and tariffs can disrupt supply chains and affect the performance of local companies that rely on global markets. Investors must monitor developments in international trade relationships, as they can create opportunities or pose risks to various industries.
In conclusion, the economic and investment landscape is influenced not only by domestic policies but also by international events and trends. To be a savvy investor, you need to keep an eye on the broader global stage, understand the interconnected nature of the world's economies, and be prepared to adjust your investment strategy in response to international factors, fiscal policy, and monetary policy changes.
Jeffrey Triganza is head of market analysis at Vantage Markets. Vantage Global Prime Pty Ltd is authorised and regulated by the Australian Securities & Investments Commission (ASIC) AFSL no. 428901. Disclaimer: This article is not intended as investment advice.