Losing Its Coveted AAA Rating May Be Just What Australia Needsby and
No economists expect rate cut Tuesday as easing seen off table
Government should be relieved of battle to retain AAA: Westpac
Australia’s economy appears to have entered a stimulus stalemate.
Reserve Bank of Australia Governor Philip Lowe fears further interest-rate cuts will prompt more borrowing from households already carrying record debt and put the nation’s financial system at risk. So it seems easing is off the table.
In the fiscal corner, ruling parties are so terrified of losing the country’s AAA credit score they’re refusing to entertain stimulus to bolster growth and hiring. Veteran Westpac Banking Corp. economist Bill Evans’s solution for breaking the deadlock: a rating downgrade.
If the government “is relieved of its battle to retain the AAA it may be more open to adopting a sensible long-term infrastructure program,” Evans said. “Such a program would boost productivity and while the direct short-term impact on demand might be limited, it is likely to boost the confidence and growth expectations of the business community.”
The need for action is pressing: Australia’s economy probably almost ground to a halt last quarter, with economists forecasting data Wednesday will show growth of just 0.2 percent from three months earlier and 2.5 percent from a year before. The annual figure is down from a rapid clip of 3.3 percent in the second quarter.
On top of that, the labor market is weakening as employers opt to hire part-time rather than full-time workers and participation slumps. That’s resulted in record low wage growth and suggests little immediate prospect for inflation to accelerate back to target.
Government data Monday showed company profits rose just 1 percent last quarter, a third of the pace forecast by economists and underscoring a lack of business investment. In short, the economy has plenty of spare capacity and needs help.
The Organization for Economic Cooperation and Development and the International Monetary Fund have both urged Australia’s authorities to spend on infrastructure. The government says it needs to bring the budget back to surplus -- currently forecast for 2020-21 -- before borrowing for investment.
Indeed, for the past five years, both sides of politics have relied on the RBA’s easing cycle to tide the economy over.
John Hewson, a former leader of the ruling Liberal Party and central bank economist, said it’s only a matter of time before Australia is downgraded because of its deteriorating budget position.
“The fact that we are going to lose the triple-A credit rating is a foregone conclusion, it’s just a question of timing,” Hewson, who was leader of the Liberal opposition in the 1990s, told Sky News TV Sunday.
The government is due to release a mid-year economic and fiscal outlook on Dec. 19.
Lowe has signaled strongly that the era of rate cuts supporting the economy is now at an end. The cash rate is at a record-low 1.5 percent and Sydney house prices are rising to precipitous levels. Money markets have taken the governor at his word, effectively pricing out policy moves over the next 12 months. All 27 economists surveyed by Bloomberg expect no change at Tuesday’s meeting.
“The government should not look to the RBA for a ‘short-term’ fix by further boosting household debt with even lower rates,” Westpac’s Evans said.
For Lowe and Evans, the numbers tell the story: government debt is low by international standards; corporate debt is about average; and household borrowing is at a record high. As a result, it’s the government that has the room on its balance sheet to stimulate.
Even if borrowing for infrastructure investment comes at the cost of the AAA, history suggests the impact will be limited. Rates in Queensland fell after the state lost its top grade; internationally, the same occurred in the U.K. and U.S.
But political fear is a powerful force, and the government is trying to plug the deficit to avoid the opprobrium of being the party that lost the top rating.