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Implications for investments

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. 


Australian Federal Budget

Mercer’s Perspective


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[1], 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.


[1] Quantitative Easing in Australia and the Implications for Financial Markets, Mercer June 2019







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