Credit rating downgrade wouldn’t be a big deal - Capital Economics
Australia & New Zealand Economics

Credit rating downgrade wouldn’t be a big deal

Australia & New Zealand Economics Weekly
Written by Ben Udy

S&P lowered the Australian credit rating outlook to negative this week and given the likely deterioration in the fiscal balance, Australia could lose its AAA rating before long. But we don’t think that would cause an increase in borrowing costs so the government should not be too worried. Meanwhile, given the reduction in new coronavirus cases in Australia, there have been reports that social distancing restrictions and lockdowns could be lifted sooner than we had anticipated. That would be an upside risk to our very downbeat forecasts.

Australian rating outlook lowered

S&P has lowered the Australian credit rating outlook from ‘stable’ to ‘negative’ on the back of rising government debt. S&P has also noted it may officially lower Australia’s AAA within the next two years depending on the extent of the fiscal and economic damage caused by the virus.

Our own dire forecasts suggest that a credit rating downgrade is on the cards. Indeed, the government has already committed fiscal support worth around 10% of GDP. Add in the impact of higher spending on unemployment benefits and lower tax revenue and the Budget deficit is set be exceed 7% of GDP over the next two fiscal years. Before the virus outbreak the current government had stated it was highly committed to maintaining Australia’s AAA status.

However, the government will have to tread carefully when tightening fiscal policy over the coming years as this could result in a renewed slowdown in GDP growth. In any case, there isn’t much point defending the credit rating too valiantly. We have written before that a credit rating downgrade is unlikely to result in higher borrowing costs. Indeed following the credit rating downgrade in 1986 yeilds actually fell compared to the US. (See Chart 1.) We therefore don’t think the Australian government should be overly concerned with maintaining its AAA credit rating.

Chart 1: 10-year Govt. Bond Yield & Australian Credit Rating (%)

Source: Refinitiv

Easing of restrictions on the cards

There has been further evidence this week that Australia is ‘flattening the curve’, with the number of daily new cases falling to the lowest levels since mid-March. (See Chart 2.)

Chart 2: Australia Daily New Virus Cases

Source: thegardian.com

This has led to calls for social distancing and lockdown measures to be relaxed. Scott Morrison has pushed back against these calls stating that restrictions won’t be lifted until the modelling points clearly to Australia having got the virus under control and “that’s no time soon”.

However, New South Wales premier Gladys Berejiklian has said that she would consider tweaking social distancing measures as early as May 1st if she received that advice. We had assumed that activity would be severely restricted until at least June. An earlier end to the restrictions would therefore be an upside risk to our forecasts that GDP falls by 15% q/q in Q2. To be sure, the restrictions are unlikely to be lifted all at once. But once governments no longer encourage their citizens to stay at home, consumption should bounce back somewhat.

The week ahead

We have pencilled in a rise in the unemployment rate to 5.6% in March. And if our forecasts are right, that rise is only the beginning.


Data Previews

Australia Labour Market (Mar.) Thu. 16th Apr.

Forecasts

Time (AEDT)

Previous

Consensus

Capital Economics

Change in Employment

11.30

+26,700

-15,000

-50,000

Unemployment Rate

11.30

5.0%

-5.4%

5.6%

Virus impact should start to show

The decline in the unemployment rate in February will have surely come undone in March as the spread of Covid-19 started to have an impact on the labour market.

Admittedly, the labour market statistics were collected between the 8th and the 21st of March. Much of that period would have preceded the full impact of the virus on the economy. Even so, we doubt that many companies were looking to hire at that time, and Qantas stood down more than 20,000 employees during that period. What’s more, business surveys pointed to a downturn in hiring intentions even before the virus outbreak. (See Chart 3.)

We have pencilled in a decline in employment of 50,000 in March. That won’t even scratch the surface of the surge in unemployment in the coming months but it would see the unemployment rate rise to 5.6%.

Chart 3: Employment & Employment Surveys (% y/y)

Sources: Refinitiv, Capital Economics


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time AEST

Time (NZST)

Previous*

Median*

CE Forecasts*

Fri 10th

Aus

Good Friday (National Holiday)

NZ

Good Friday (National Holiday)

Sat 11th

Aus

Easter Saturday (National Holiday)

Mon 13th

Aus

Easter Monday (National Holiday)

NZ

Easter Monday (National Holiday)

Tue 14th

NZ

Net Migration (Feb.)

08.45

(10.45)

6490

Aus

NAB Business Confidence (Mar.)

11.30

(13.30)

-4

-10

Wed 15th

NZ

Consumer Food Prices (Mar.)

08.45

(10.45)

+0.0% (+3.1%)

Aus

Westpac Consumer Confidence (Apr.)

10.30

(12.30)

91.9

Thu 16th

Aus

Consumer Inflation Expectation (Apr.)

11.30

(13.30)

(+4.0%)

Aus

Change in Employment (000s) (Mar.)

11.30

(13.30)

26.7

-15.0

-50.0

Aus

Unemployment Rate (Mar.)

11.30

(13.30)

5.1%

5.4%

-5.6%

Fri 17th

No Significant Data Released

Also expected during this period:

10th – 14th

NZ

REINZ House Price (Mar.)

+4.0% (+14.8%)

Selected future data releases and events

20th Apr

NZ

Consumer Prices (Q1)

21st Apr

Aus

RBA Gov. Lowe Speech

5th May

Aus

RBA Policy Announcement

13th May

NZ

RBNZ Policy Announcement

*m/m(y/y) unless otherwise stated; p=provisional estimate

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

%q/q(%y/y) unless stated

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

2019

2020

2021

Australia

GDP

+0.6(+1.8)

+0.5(+2.2)

-1.9(-0.2)

-15.0(-16.0)

+6.0(-12.0)

+5.0(-8.0)

(+1.8)

(-9.0)

(+8.0)

CPI Inflation (nsa)

(+1.7)

(+1.8)

(+1.7)

(+0.7)

(+0.6)

(+0.5)

(+1.6)

(+0.9)

(+1.5)

Core CPI Inflation1 (nsa)

(+1.9)

(+1.7)

(+1.9)

(+1.6)

(+1.1)

(+0.8)

(+1.6)

(+1.3)

(+0.7)

Unemployment Rate (%)

5.2

5.2

5.3

10.0

12.0

11.0

5.2

9.0

10.0

RBA Cash Rate, End Period (%)

1.00

0.75

0.25

0.25

0.25

0.25

0.75

0.25

0.25

US$/AUS$, End Period

0.67

0.70

0.60

0.61

0.62

0.62

0.70

0.62

0.65

New Zealand

GDP (production basis)

+0.7(+2.3)

+0.6(+1.8)

-0.3(+1.0)

-30.0(-29.0)

+20.0(-14.0)

+8.0(-8.0)

(+2.3)

(-12.0)

(+15.0)

CPI Inflation (nsa)

(+1.5)

(+1.9)

(+1.8)

(+0.7)

(+0.4)

(+0.5)

(+1.6)

(+0.8)

(+1.9)

Core CPI Inflation1 (nsa)

(+1.8)

(+2.0)

(+1.9)

(+1.9)

(+1.3)

(+0.8)

(+1.7)

(+1.5)

(+0.9)

Unemployment Rate (%)

4.1

4.0

4.5

11.0

15.0

12.0

4.1

10.5

10.0

RBNZ Cash Rate, End Period (%)

1.00

1.00

0.25

0.25

-0.25

-0.75

1.00

-0.75

-0.75

US$/NZ$, End Period

0.62

0.67

0.60

0.60

0.60

0.60

0.67

0.60

0.63

Aus$/NZ$, End Period

0.93

0.96

0.99

0.96

0.97

0.97

0.96

0.97

0.97

Sources: Bloomberg, Capital Economics; 1Excludes food, household energy and vehicles fuel.


Ben Udy, Australia & New Zealand Economist, ben.udy@capitaleconomics.com