Restarting Australia’s economy
The rapid and coordinated fiscal and monetary policy responses by the Australian government and the RBA over the past six months have helped mitigate the most severe economic downturn the country has witnessed since the 1930s. The combination of personal income tax cuts, handouts and business incentives such as depreciation and tax loss offsets, as well as infrastructure spending represent a balanced dose of fiscal stimulus.
Having dodged recession for nearly three decades, on balance Australia has managed the COVID-19 crisis better than most developed nations with a relatively smaller decline in GDP. While gross debt is expected to reach over $1 trillion and is projected to stabilise at around 55% of GDP in the medium term, Australia’s outlook remains in a better position than many other economies, where average gross debt stands at 120% of GDP.
Australia’s government debt level ranks favourably against other developed nations with an AAA credit rating. Whether Australia’s credit ratings will be lowered depends on whether the coronavirus causes economic damage that is more severe or prolonged than expected.
A better credit rating typically allows governments and banks to pay lower interest rates when borrowing in international debt markets. But with all countries' budgets deteriorating because of COVID-19, and quantitative easing in place, it is far from clear whether a ratings agency downgrade will push up the cost of federal government borrowing. It would be a mistake for the government to change fiscal policy to defend the AAA rating in this environment.
Labour market conditions are expected to strengthen beyond 2020. The policies announced at the Budget will help us keep grinding ahead. From all of the above perspectives, the Budget should be received favourably by financial markets and indeed with much of the Budget leaked, the market has already rallied ahead of the event.
Going forward we expect the Australian share market to continue to be dominated by external events, including the progress of the global pandemic and the upcoming US elections. Both fiscal and monetary policy will continue to be supportive and market focus will also shift to the next RBA policy meeting in November for potential marginal interest rate cuts.
This content is intended to inform clients of Mercer’s views on particular issues. It is not intended to be provided to any person as a retail client and should not be relied upon or used as a substitute for professional advice specific to a client’s individual circumstances. Whilst Mercer believes the prospective information and forward looking statements made by Mercer in this report are based on reasonable grounds, they are predictive in character and may therefore be affected by inaccurate assumptions or by known or unknown risks and uncertainties. This content has been prepared by Mercer Consulting (Australia) Pty Ltd (MCAPL) ABN 55 153 168 140, Australian Financial Services Licence #411770. Any advice contained in this content is of a general nature only and does not take into account the personal needs and circumstances of any particular individual. Prior to acting on any information contained in this content you need to take into account your own financial circumstances, consider the Product Disclosure Statement for any product you are considering and seek advice from a licensed, or appropriately authorised financial adviser if you are unsure of what action to take. ‘MERCER’ is a registered trademark of Mercer (Australia) Pty Ltd ABN 32 005 315 917.
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