BUDGET 2016/17
A further deterioration in the budget position will raise alarm bells over the Turnbull government's handling of Australia's $1.7 trillion economy.
It would put the nation's triple-A rating at risk should the timing of a budget surplus be pushed out further.
It would make for a tough budget next May as Morrison scrambles to balance the books and a set of stringent measures that may struggle to get through the parliament.
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ECONOMY
The economy has posted its worse performance since the global financial crisis. While economists expect the economy to avoid two consecutive quarters of negative growth and a technical recession, it is a a threat hanging over the government until the next set of national accounts figures in early March.
At an annual rate of 1.8 per cent, growth is running shy of the 2.5 per cent pace predicted in the May budget.
LABOUR MARKET
The jobless rate unexpectedly rose to 5.7 per cent in November, ending a steady decline over the year. Employment growth has been fairly flat over the second half year, highlighted by a switch to part-time hirings rather than full-time.
This has resulted in wages growth slowing to a record low and keeping only just ahead of inflation. Benign wage growth and rising unemployment will be a further drag on the budget.
INTEREST RATES
The Reserve Bank has shown reluctance to trim the cash rate any further after cutting to a record low of 1.5 per cent in August. However, the growth figures were weaker than the central bank had been expecting, causing some economists to believe a cut will be on the cards when the RBA board next meets in February.
The risk is retail banks will not pass on the reduction given they are already increasing some of their lending rates against the backdrop of rising global interest rate markets.
CONFIDENCE
Consumer confidence has been shaken out of a period of stability by the poor GDP numbers, weak jobs growth and uncertainty over the interest rate outlook.
Such pessimism comes at a critical time for retailers, who will be hoping for some good news to encourage the seasonal spend-up. But Morrison has indicated there won't be any seasonal cheer in the budget update.
GLOBAL ECONOMY
The biggest uncertainty is what US president-elect Donald Trump will do when he takes the reins at the White House in January.
Markets have assumed he will take an expansionary stance, which has caused interest rate markets to price in tighter global monetary policy.
The big unknown is whether Trump will go ahead with a threat to slap a big import tariff on Chinese goods, which could have ramifications for the Australian economy given its close trade ties with the Asian giant.
COMMODITY PRICES
Iron ore and coking coal prices have put in an extraordinary performance in recent months to stand well above levels that were assumed in the May budget, and posing a dilemma for Treasury when it puts together its updated assumptions.
While helping in improving the national income, economists question whether iron ore prices at around $US80 per tonne and coking coal at $300 per tonne are sustainable.
CREDIT RATINGS
Global rating agencies will be watching the budget update with a keen eye. Standard & Poor's already has Australia's top-tier triple-A rating on a negative outlook.
A feared downgrade would result in banks paying more for funding in overseas markets and accelerate the risk of higher interest rates for their customers. It would also be a big hit to confidence and for the government.
